Accounting and Society(The Minerals Resource Rent Tax) - Essay Example

?ACCOUNTING AND SOCIETY (THE MINERAL RESOURCE RENT TAX) Table of Contents Introduction 3 2.Literature Review 3 2.1Mineral Industry in Australia – An Overview 3 2.1.1Industry Potential 3 2.1.2Industry Structure 4 2.2Mining Sector and Tax Policy 5 2.2.1Mining Resource Rent Tax (MRRT) 6 2.2.2MRRT – Features 6 3.Analysis 8 3.1MRRT vs. RSPT – A Comparison 8 3.2Potential Impact of MRRT on Accounting Policies 10 4.Conclusion 12 References 14 1. Introduction The Government of Australia has proposed a new resource rent tax known as Mineral Resource Rent Tax (MRRT) that will be effective from the beginning of July in 2012. It replaces the earlier proposed Resource Super Profits Tax or RSPT. Australia is quite rich in its natural resources in the form of minerals, oil, natural gas, etc. Australian government collects huge revenue from the taxes paid by the mining industries in the country. The various new features of MRRT have been included in this study. Moreover the potential impacts of the introduction of MRRT on the accounting policies followed by the mining companies have also been studied. 2. Literature Review 2.1 Mineral Industry in Australia – An Overview Mineral Industry of Australia has been reviewed and its inherent potential and its industry structure have been studied in this report. 2.1.1 Industry Potential Australia is well known for its varied natural resources. Both metallic and non-metallic minerals are widely found in Australia. It is rich in fuel minerals too. Commodity exports from Australia in the form of minerals and energy constitutes a significant portion of Australian economy. Earnings from commodity exports are expected to rise on a continuous basis for Australia because of rising demand of mineral resources worldwide. Global Financial Crisis (GFC) had an adverse effect on the mineral industry in Australia. The rise in the production of commodities like iron ore, copper, bauxite, natural gas, etc. have slowed down in the recent years. However, the country has a huge potential of mineral production and several investment projects are expected to come up or are already going on. Western Australia is the leading state of the country in terms of exports of metallic minerals. Major areas of coal exports in the country are Queensland and New South Wales. However to have a sustainable growth in mineral exports Australia needs a significant improvement and expansion in its infrastructural facilities. Australia falls amongst the top 10 mineral exporting countries in the world. There has been a significant increase in the spending in terms of mineral explorations in the country. Mining industry of Australia also forms a significant component of the GDP of the country. Many people get employment opportunity in the mining sector as well. Hence mineral industry is expected to contribute to Australian economic development in a significant way in future (IBP USA, 2005, p.48). 2.1.2 Industry Structure The mine industry in Australia follows a free enterprise system. Private companies of the country take part in all the mining activities like exploration, production, development and marketing of minerals. Significant numbers of mineral companies in Australia are subsidiaries of companies in US or Europe. It controls a major part of the refining and mining sector in Australia. Relevant State Governments hold the ownership rights of mineral exploration in Australia. Ownership of minerals in Australia is divided amongst State and Commonwealth ownership in onshore and offshore areas of the country. The mineral industries in each areas of the country are administered by the government authorities in Territories and States, depending on the region in which they fall. The administering process by the Government includes activities like land registration, issuing exploration permits, ensuring the compliance of government regulations related to safety, health and environmental matters, levying taxes and royalties, etc. Hence, government has an effective control over the production of most of the minerals produced in the country. Australia relies greatly on mineral exports and forms a significant portion of the total exports made in the country. Asian countries are the main consumers of mineral exports of Australia. Australia is the top exporter of minerals like coal, iron ore, alumina, etc. in the world (Tse, 2011, p.3.2). 2.2 Mining Sector and Tax Policy With respect to general taxation rules, the mining industry in Australia is at par with other industries in Australian economy. It includes GST, taxation of income, transaction taxes, payroll tax, and so on. The tax base for income generated through mining resembles the general income tax structure with the exception of immediate expenses based on outlays related to exploration which resembles expenses incurred in R&D outlays. Apart from these different types of special taxes are also imposed on the industries related to mining sector. The projects related to exploration of oil and natural gas based on offshore regions, Petroleum Resource Rent Tax (PRRT) is levied by the Commonwealth Government. It excludes regions that are based on the North West region. PRRT is imposed on the cash flow measures. Losses incurred can be carried forward. However refunds due to losses are not allowed. Progressive taxation rate is applicable on Shelf Energy in North West. State government imposes taxes in the form of special taxes on investments that are related to on-shore regions. Most of these taxes are based on the profit earned and are mainly super profits. Government also imposes additional taxes based on royalty. The Future Tax System of Australia was reviewed in May 2010, with a view to replace royalties. Proposal was made for the imposition of a new taxation policy related to resource rents. It was known as Resource Super Profits Tax (RSPT) that was scheduled to be effective from July 2012. However the proposal made regarding RSPT was soon removed and replaced with Mining Resource Rent Tax (MRRT). MRRT is a type of extension of the existing PRRT that would be levied on mineral resources explores on-shore (Freebairn & Quiggin, n.d., p.1-9). 2.2.1 Mining Resource Rent Tax (MRRT) MRRT is supposed to replace RSPT that was proposed earlier. It is to be effective from July 2012. MRRT is intended for tax to be levied on the earnings generated from exploiting the existing non-renewable resources like coal, iron ore etc. in Australia. The applicable tax rate would be 30% of the earnings in the form of super profits generated by the mining industries by exploring minerals like iron ore and coal in the country. Initially RSPT was proposed as a result of the response on the review of existing Future Tax System of Australia, more commonly known as Henry Tax Review. It was proposed by Kevin Rudd, who was the Prime Minister of Australia then and Wayne Swan, who was Treasurer. Later in June 2010, when Julia Gillard Was appointed as the Prime Minister of Australia, RSPT got abolished and MRRT was enacted. MRRT resembles the concept of existing PRRT but differs in the mode of operation. PRRT is meant for off shore exploration of petroleum, whereas MRRT is meant for on shore exploration of resources like coal and iron ore which are non renewable sources of energy (IBP USA, 2005, p.167-168). 2.2.2 MRRT – Features The important features of MRRT can be summarized as follows: 1. Taxpayers are required to pay MRRT if the assessable profit is more than equal to $75 million p. a. Others are exempted from MRRT. 2. The rate of taxation for MRRT is set to be levied @ 22.5%. It is less than the nominal rate by 7.5%. 25% of the nominal rate (i.e. 30%) is considered as extraction allowance for recognizing the utilization of specialized skills. 3. Immediate write-off would be applicable for all new investments and no depreciation is required to be charged against it. Hence, it would allow the mining projects to have an access to immediate deductions. It would not be required to pay MRRT until it recovers all its initial investments and makes a sizeable profit. 4. The unutilized losses on account of MRRT would be carried forward into future years at a rate equal to 7% more than the rates applicable in long term bonds issued by government. 5. Transferring of deductions is allowed under MRRT provisions. It would assist in development of mine because MRRT liability that arise on account of a project which is in its production phase can be offset by utilizing the deductions that are available due to another project which is in its construction phase. 6. The state royalties which a taxpayer pays in relation to his mining project have the facility of full credit under the provisions of MRRT. The credits which remain unused on account of the royalties that has been already paid to the State would be raised to a rate equal to 7% more than the long term bonds issued by the government in accordance with other expenses. However royalty credits which remain unused are neither refundable nor can be transferred to other existing projects of the taxpayer. It has been recommended by PTG that MRRT provisions must not be utilized as a means of raising inefficient royalties by the Territories and States and it should not have any incentive in doing so as well. 7. Past investments made can be recognized under the provisions of MRRT with the help of a credit which recognizes the investment in its market value. Next it can be written down, extended over a maximum period of 25 years. 8. However there is a provision of accelerated depreciation extended over a period of 5 years for those companies who wishes to utilize its current written down values of assets but not including the resource value. This methodology which calculates the initial base can be increased at a rate equal to 7% more than the long term bonds issued by government. 9. A particular unique characteristic of each of the commodities under the purview of MRRT would be recognized through the application of a taxing point which is very close to the extraction point. Appropriate arrangements for pricing would also be employed to ensure that taxation is applied solely on the extracted resource value (Australian Government, 2012, p.2). 3. Analysis 3.1 MRRT vs. RSPT – A Comparison MRRT was replaced with RSPT that was proposed earlier. The key differences between the two can be outlined as follows: 1. Provisions of RSPT would have included all the petroleum and mining industries in Australia. More than 2500 organizations based on Australian mining and petroleum industry would have fallen under RSPT. Whereas, MRRT excludes the companies involved in petroleum extraction and includes only those companies which are engaged in mining of coal and iron ore. For petroleum mining, existing PRRT would apply. 2. A tax rate equivalent to 40% of the profits earned at a rate over and above the 10-year bonds issued by the government would have been applicable in case of RSPT. Whereas, the nominal tax rate applicable in case of MRRT is 30%. 3. RSPT was applicable on value realized on the mineral and petroleum resource deposits. Whereas, MRRT is applicable only on the exact value of the resources and not on any other valued that is added by the concerned organization. 4. In case of RSPT deductions are allowed for the expenses incurred by companies while extracting resources till it reaches the point of taxation. In case of MRRT extraction allowance equal to 25% of the nominal tax rate is allowed. 5. The starting base in case of RSPT was the total book value or written down value of the existing capital. In case of MRRT, mining companies have the option of choosing either the book value or the market value to be considered as the initial base for the assets involved in the mining project. If the book value is chosen as the initial base then it would be uplifted by an amount at the rate of 7% more than the rate of long term bonds issued by the government. 6. In case of RSPT, exploration rebate would have been available to have the provision of tax offset that are refundable at a rate equal to the corporate tax rate. In case of MRRT no rebates would be available. However companies would have the provision for claiming deductions against costs incurred because of exploration of minerals (The Age, 2010). 3.2 Potential Impact of MRRT on Accounting Policies Most of the mining companies will be affected with the introduction of MRRT from July 2012. The key issues related to accounting policies of affected mining companies on account of MRRT are discussed below: The first issue that should be considered is that whether MRRT is in accordance with the AASB 112 related to income tax or not. Taxes which are based on the taxable profits are included in the scope of AASB 112. In the context of Australia, the Australian Accounting Standards Board (AASB) introduced an interpretation 1003 which was related to PRRT. It thus confirmed that PRRT was an income tax which is within the purview of AASB 112. The proposed MRRT has been designed which is quite similar to PRRT regime. The basis of taxation in MRRT is not gross profit but net profit which is the difference of mining revenue and mining expenditure. Hence MRRT can be considered as income tax in accordance with AASB 112. Practically the implementation of MRRT will have varied effects on the mining companies in Australia. These issues would be mainly related to tax accounting issues. a. Starting base measurement following an appropriate method of valuation: According to the provisions of AASB 112, business entities need to determine its tax base related to its liabilities and assets on a date either before or on the reporting date. Hence, business entities are required to determine the methodology that it will be using for the starting base valuation. Next when the determination of methodology is over, the organizations need to calculate the starting base so as to have the measurement of transitional balances of deferred taxes. However it is not required to elect the starting base for MRRT to an immediate effect. It is because MRRT is being enacted from July 1, 2012 and a business entity which falls under the provisions of MRRT will be required to file its return related to the choice of starting tax base well after the completion of first year under MRRT. The business entities which opt to use market value as its starting base would be required to provide market valuations which are indicative and other supporting evidences for its estimated valuations. This would be required while preparing the various financial statements in order to support its resulting balances of deferred taxes and the starting tax base. b. Recognition of balances of deferred tax: With the imposition of MRRT, due to transition into this new taxation rule, it may give rise to assets in the form of deferred tax for the business entities. It may occur if the value of assets that is carried in the company accounts is less than the initial value of the assets of the project. Adoption of market value as the methodology for the valuation of the initial project base will result in such situation for the business entities. In such situation, companies are required to follow the recognition criteria of assets under AASB 112. MRRT Models having detailed information regarding future forecasts of deductions related to starting base are required to be prepared by the companies. On the basis of these models, probability of deductions related to starting base is to be determined. Moreover, the business entities are required to make assumptions related to taxable income estimates in future. c. Future tax expense volatility: It is expected that MRRT transition would have a material effect on expenses related to taxes and it can have an immediate effect on the organizations. The volatility of tax expenses in future are also expected to increase for the entities. This would be the most likely case for the entities, if the introduction of MRRT results in huge assets in the form of deferred taxes. Changes in taxable income estimates in future would require the entities to reassess the probability related to the recovery of assets in the form of deferred taxes. Variation in deferred taxes would be recognized as variations in the expenses related to income taxes in the current period. Underlying assumptions like that of foreign exchange rates that are to be used in the MRRT models prepared by the companies may vary in future and can have a significant impact on the tax expenses of the companies. Hence companies are required to develop strategies that would enable them to counter this uncertainty of tax expenses in future (Ernst & Young, 2011, p.2-5). 4. Conclusion Australia is the leading exporter of minerals like coal and iron ore in the world. The country is rich in natural resources in the form of minerals, petroleum, natural gas, etc. Hence a significant portion of the country’s economy is attributed to the revenues generated from the export of minerals. GFC had an adverse effect on the production of minerals in Australia. However Australia has a huge potential in mineral production and there it is expected to result in the growth of the economy on a continuous basis. Mining industry in Australia follows a free enterprise system and there are many private organizations operating in the company to explore and export mineral resources in the country. The State and the Commonwealth government of Australia have the ownership rights of mineral exploration in Australia. Hence taxes paid by the mining companies form a significant portion of the revenues generated by the Australian government. Recently the government of Australia has proposed the Mineral Resource Rent Tax (MRRT) that will come into effect from the beginning of July in 2012 and is applicable to all the mining industries in Australia. MRRT has replaced its predecessor Resource Super Profits Tax (RSPT). The introduction of MRRT will have a significant impact on the accounting policies followed by the existing mining companies in the country. It would mainly result in issues related to tax accounting policies of the business entities. It would require having an appropriate method for the measurement and valuation of starting base of the projects that are to be undertaken by the companies. It would result in assets in the form of deferred taxes which are to be properly recognized by the companies. The probability associated with the recovery of these assets in the form of deferred taxes is also required to be determined by the companies. Furthermore, the companies are expected to be exposed to the volatility of tax expenses in future. Hence it can be concluded that, with the introduction of MRRT, the mining companies are to make significant changes in its tax accounting policies and develop strategies to counter its adverse effects. References Australian Government. (2012). Fact Sheet: A New resource Taxation Regime. Retrieved from http://www.futuretax.gov.au/content/FactSheets/downloads/fact_sheet_rescource_taxation_regime032012.pdf. Ernst & Young. (2011). Minerals Resource Rent Tax / Petroleum Resource Rent Tax: The Implementation Challenge. Retrieved from: http://www.ey.com/Publication/vwLUAssets/MRRT_PRRT_Tax_Insight-The_implementation_challenge/$FILE/MRRT_PRRT_Tax_Insight-The_implementation_challenge.pdf. Freebairn, J. & Quiggin. J. (no date). Special Taxation of the Mining Industry. Retrieved from http://www.uq.edu.au/rsmg/WP/WPP10_3.pdf. IBP USA. (2005). Australia Mineral and Mining Sector Investment and Business Guide. USA: International Business Publications. The Age. (2010, July 2). RSPT v MRRT - the differences. The Age. Retrieved from http://www.theage.com.au/business/rspt-v-mrrt--the-differences-20100702-zs7a.html?rand=1278035409262. Tse, P. K. (2011). The Mineral Industry of Australia. USGS, 2010 Minerals Yearbook. Retrieved from http://minerals.usgs.gov/minerals/pubs/country/2010/myb3-2010-as.pdf. Read More