Mineral Resource Rent Tax - Case Study Example

? Assignment Mineral Resource Rent Tax (MRRT) Executive Summary The Government of Australia will introduce the Resource Super Profits Tax (RSPT) under the recommendation of the Australia’s Future Tax System Review. The RSPT will ensure equal distribution of profits among all Australian mining companies and the government. It was expected by the Australia’s Future tax System Review that the new taxation charges would help in the improvement of the taxation system prevailing in the country and thus also help the mining industries to revive. RSPT is a neutral tax that will set a new benchmark for the resource taxation. Introduction of RSPT would lead to reduction in the income tax but it was expected that such would not lead to the reduction in revenue, since the decrease in tax would encourage companies to undertake more projects which would lead to rise in the revenue. This increase in revenue would be utilized by the government of Australia for bringing about infrastructure development in the country. The Australian Government decided to provide the resource entities with a refundable credit for the royalties paid by them in the previous years, so that the mining companies receive an extra relaxation on their taxation policies and they are encouraged towards revenue generation. Introduction The Australian Government accepted the proposal of the Australia’s Future Tax System Review to introduce a tax charge on the resource rents and the super profits earned by the mining companies from the exploitation of the non-renewable resources of Australia. This new tax policy will be known as Resource Super Profits Tax (RSPT). The RSPT would provide the community of Australia with a share of income that will be derived from the extraction and sale of non-renewable resources of Australia in countries all over the world. It would improve the present system of taxation, reduce royalty payments and encourage investments and productivity from the mining companies which would help to bring development in the resource sector. The tax system would also improve the generation and distribution of the income structure of the country, thus bringing about equity. Revenue generated from RSPT would provide opportunities for economic reforms which would bring about improvement in economic performance and productivity and also lead to growth in national income. The RSPT was replaced by the Minerals Resource Rent Tax (MRRT) in late June 2010 because of a resulting controversy in terms of RSPT. The objective of the government in the implementation of the MRRT policy was same as that of the RSPT, along with an additional objective to overcome the controversies and adverse affect faced on the implementation of the RSPT. The area of consideration of the MRRT was limited than the RSPT, which increased its relevance and brought efficiency. The MRRT policies received support from mining unions such as Forestry, Energy Union, Construction and Mining, Australian Greens, and from the Australian Council of trade Unions. The new policy led to the reduction in tax for the mining companies, thus fulfilling one of the objectives with which the policy was introduced. Answer 1. The main features of Resources Super Profit Tax are- The nominal tax rate of 40% on assessable resource profits is applicable. The tax is to be imposed on revenue earned after deducting the allowance for capital expenditure. The tax is to be imposed on profits above the normal rate of return, which is determined to be 6%, being the risk-free long term bond rate. To compensate for the higher risk that is involved in the mining ventures, losses on abandoned projects were to be refunded at the mirror rate of 40% of the loss suffered (Kreiser, et al., p.227). Features of Minerals resource rent tax (MRRT) are- The proposed MRRT will apply to the coal and iron ore projects in Australia from 1st July, 2012 at 30% rate. The projects will be entitled to an extraction allowance of 25% which shall reduce the taxable profits subject to the MRRT. MRRT liability will not apply to small miners having resource profits of less than $50million per annum. As a starting base for project assets, miners will have an option of using either book value or market value The process of depreciation over a period of time on investments is to be altered. Any investments made after 1st July, 2012 will be written of immediately. The loss arising as a result of MRRT is to be transferred to other coal and iron-ore projects in Australia. MRRT losses that would remain unutilized would be carried forward and uplifted at the government long-term bond rate (LTBR) with an additional 7% (CCH, pp.1102-1103). Resources Super Profits Tax (RSPT) differs from Mineral Resource Rent Tax (MRRT) in a number of ways as mentioned in the following- Resource Profit tax is applicable on a wider segment as compared to MRRT which is to tax only coal and iron-ore. MRRT will not be imposed on producers whose assessable profits are less than $50million per annum. The nominal tax rate in case of RSPT is 40%, whereas for MRRT, it is 30%. Due to 25% of extraction allowance the effective MRRT nominal tax rate is 22.5%. When income tax is added, the effective combined tax rate for companies under MRRT will be between 42%-45%, whereas under RSPT the potential rate will be 58%. MRRT is applied on the operating margin, less extraction allowance and MRRT allowance. Whereas such is not the case in RSPT. Unutilized losses can be carried forward at the LTBR with an additional 7%. But such is not applicable to RSPT (Kreiser, et al., p.228). RSPT was payable on the realized value of the resource deposit, whereas MRRT will apply on the value of the resource rather than the value added by the miner. Answer 2. The resource rent tax proposed by Henry Tax review was labeled as Resources Super Profits Tax (RSPT).Minerals form a precious resource to the state and the government allows companies to do business with it by allowing them to extract the minerals from the ground and sell them in the global market. For receiving the right and permission to extract minerals the companies must pay a charge to the stat governments in the form of royalty payments. The main drawback behind the payment of royalty as a charge for the right available for extraction of metals is the economic distortion caused as a result of such charge. The payment of royalty is usually made on the amount of ore produced inspite of the fact that whether the miner has made any out of the sale of that amount of ore. Thus, this discourages the mining companies and they hesitate to undertake riskier investments for ores that are of low grade and are also costlier to extract. This results in generation of low profits. Mining is a risky business which requires a significant number of capital and labour inputs and is costly to undertake. Miners in return of their hard work seek a fair return from their investments, and thus only undertake those projects which will give a fir return after paying all the expenses and taxes. Like all other business in Australia, mining companies also provide a tax of 30% on their profits to the government. Sometimes mining companies earn super profits. But, since the profits are said to arise as a result of rise in the value of commodities above the anticipated level by the investors, so there lies a point to determine whether the profits is accrued to the mining companies of Australia or the government of Australia. Thus, the resource super profit tax was introduced, as it was expected that the tax policy would divide the super profits above the normal rate of return between the country and the mining company in the fairest ways. There are 2ways of determining the normal rate of return. First is the super profit tax, i.e. the petroleum resource rent tax levied in Australia since 1988, that is to be paid on profits above normal profits arising from the sale of offshore gas and oil, and the normal rate of return is 11%. This is referred to as the risk-free rate which the investors are eligible to realize if they invest in the government bond. Producers of gas and oil who undertake a higher risk are eligible to get an additional 5% on the normal rate so as to compensate the higher borrowing cost. Secondly, a different tax had been proposed for the mining super profit tax. As per this a normal rate of return lower than 6% was set with no additional benefits for risks undertaken. This was done with an aim to collect tax on super profits as well as to refund an amount equal to the losses faced if the project was abandoned. The government of Australia designed the new tax system that will operate along with the state tax system. The super profit tax of a mining company will gat reduced by the amount of royalty payment to the government, so as to avoid over-taxation. Thus, super profit tax would act as a deductible business expense at the time of calculating the ordinary income tax liability of the company. Therefore, super profit tax was considered to be the efficient way to share the gains in a fair way. The main arguments that were raised in favour of RSPT are- It was the natural resource curse It encouraged Australia’s two-speed economy It emphasized the need to encourage marginal projects It brought into the necessity to act as per the international trends Answer 3. The Australian Federal Government has announced the Future Tax System of Australia in the resource Super profits Tax for the industries in the mining sector. The miners were earning huge amount of profit as a result of the new tax system. The companies were satisfied with the new tax system, as per this system fair distribution of profits was made with a perception that both the government and the mining companies are equally eligible for the accruing profits. The federal government proposed that it should earn higher profits as a result of the imposition of the new tax system. But as compared to the results, the expectations are not being met at the target level. Thus, RSPT faced vigorous opposition seeking its replacement, since the tax was imposed on profits rather than super profits. It was also opposed that the potential tax rate of up to 58% would discourage investment, leading to the damage of the mineral industry (Kreiser, et al., pp. 227-228). The MRRT was introduced to overcome the opposition against RSPT and for the development of large miners. MRRT is to be deductible from the income tax and allowed a credit for the state royalties. This gained much value in the mining sector. The large mining companies were satisfied with the introduction of MRRT, but the smaller mining companies said that the new tax system was undemocratic as it did not encourage their development. They said that the policy should be fair and equal among all states and economies. The federal government was contented with the response on imposition of the MRRT and said that the tax was imposed on the profits and not on minerals (Kreiser, et al., p.230). The miners were experiencing extraordinary profits on the imposition of the new tax system, which is to be shared among the owners of the commodities (Kreiser, et al., p.233). The finance sector improved with the imposition of the tax system, but the revenue was considered to be decreased due to decrease in the payment obtained from royalties. Because of this and the problem faced by the small mining companies, the opposition raised various issues, but they remain unsolved. Answer 4. The Resource Super Profit Tax was implemented to replace burden of payment of royalties that the mining companies had to pay to the state on the amount of resource obtained. As per this new tax policy, any profits made by the mining companies above 6% of the capital investment made by them would be taxed at 40%, and all royalties would receive a rebate. Due to a controversy regarding the RSPT between the mining companies and the government, it was replaced by MRRT. The proposed tax was imposed on 30% of the assessable profit of MRRT where the assessable profit referred to the assessable profits after deducting the expenses that included MRRT allowance. It was proposed that the MRRT Allowance is to be set on long term government bond rate in addition to 7%. The project would also be entitled for a extraction allowance of 25% which would decrease the effective tax rate to 22.5% and thus a reduced expenditure on the taxable profit. It was stated that state royalties would be deducted for the purpose of MRRT and the MRRT Payments would be deductable for the purpose of reduction of income tax. As per MRRT, it was also stated that there would be some alteration procedures for the valuation of depreciation and assets can be valued at either the book value or the market value. It was noticed on 12th February 2013, that the expected revenue was not realized as only an amount of $126million was noticed to be realized in the first six months after the introduction of the MRRT. The Prime Minister announced that a budget black hole of $12billion was noticed as on 29th April, 2013, that was partly considered due to weak revenue raised by tax and blamed the state governments for the failure. The provisions of MRRT was imposed on the super profits, (a profit of $75million was raised as on 29th April 2013), of coal and iron-ore producers with an aim of equal sharing of profits among the mining companies and the government. But it was noticed that large mining companies tried to avoid the MRRT tax by revaluing their assets and then depreciating them to an extent to which they would not be liable to pay MRRT. Prof. Garnaut said that based on the expenditures incurred in the past by the mining companies, the companies were allowed to avoid some part of the tax so as to adjust their past expenditure and so some provisions were implemented for the betterment of the companies, but the companies made a wrong utilization of the implemented provisions under MRRT and used a method to avoid tax that was not a correct and lead to the fall in the revenue. Answer 5. Before the implementation of the RSPT, the mining companies had to bear the burden of royalty payment on the amount of ore produced inspite of being noticed about the profit which the companies would be earning from selling those ore. This imposed a huge expenditure and companies did not undertake projects that were of high risk and involved high cost. This also led to reduction in revenue. So as to relief the mining companies from over tax burden the government introduced the RSPT policy, which stated that the mining companies were allowed to deduct the tax-free allowance of 6% from their existing earnings, and a tax of 40% were imposed on earnings above that and all royalties would receive a rebate. But the government was not able to realize expected profits after its implementation and the RSPT policy also suffered many oppositions saying that the reason for lower earnings was that the tax was imposed on profits and not super profits. So as to overcome this opposition the federal government of Australia introduced the MRRT policy which imposed provisions to deduct the tax rate by considering the heavy expenditure incurred by the mining companies before introduction of the policies. MRRT also acknowledged the valuation of depreciation and assets for the better of the mining companies. But the big mining companies in their attempt to reduce more taxes assorted to wrong measures. They tried to avoid the MRRT tax by revaluing their assets and then depreciating them to an extent to which they would not be liable to pay MRRT. As per the accounting standard a company is able to charge depreciation on an assets according to a prescribed rate determined on the category of the assets by the Australian Accounting Standard Board. It is also stated in the Australian Accounting Standard 10 that the revaluation of an asset class or individual asset is based on a percentage on the cost of the asset. The mining companies so as to mitigate the debate can attempt to rectify the wrong measures undertaken by them. In performing such an act the companies may try to pay of the dues which they are liable to pay if they accounted for the correct measures. Conclusion The Federal Government of Australia noticed the problems that were faced by the mining companies of Australia due to the royalty payments. The government was also concerned about the improper divisions of super profits that were arising from the mining industries. So as to solve the problems the government introduced the Resource Super Profit Tax (RSPT), which was later replaced by the Mineral Resource Rent tax (MRRT) due to the controversies faced with RSPT. After the implementation of the MRRT policies the government realized that though the mining companies were benefitting from the policies, but the government was earning much less than their targeted revenue. On analyzing the reasons it was found that the mining companies were using some improper measures so as to not pay the MRRT. Thus, the government decided to implement measures so as to stop the improper practices as a way to meet the targeted revenue. Works Cited Kreiser, Larry, et al. Environmental Taxation in China and Asia-Pacific. UK: Edward Elgar Publishing Limited. 2011. Sarkar, Tapan. 2011. Effective Tax Policy Reform through Strategic Stakeholder Communication: Lessons from Australia. Pdf. August 06, 2013. . CCH. Australian Master Tax Guide. Australia: CCH Australia Limited. 2011. taxwatch.org.au. 2010. The Resource Super Profits Tax. Pdf. August 06, 2013. . Garnaut, Ross. 2010. The new Australian Resource Rent Tax: the Resources Super Profits Tax. Web. August 06, 2013. . Roberts, Greg. 2013. Big miners outline plans to reduce MRRT. Web. August 06, 2013. . Read More