Concepts that are Relevant to the Tax on Super Profits of Mining Companies Debate - Assignment Example

 Identify and investigate some of the key corporate finance concepts and theories that are relevant to the tax on super profits of mining companies’ debate. From a corporate finance perspective, develop an argument for a particular position in this debate. , Introduction Corporate taxes are taxes which are levied on the income of one sector and are distinguished by the type of organization. Perkins claims that, the mining industry faces a new tax at a higher rate because it generates super profits. Super profits are those huge profits that companies employing natural resources usually generate. This is because there is a huge difference between the cost of extracting materials and their selling price. (Perkins) Basis for taxes The normal basis for the corporate income tax is comprehensive income. It is generally seen as the ability to pay. All income- including dividends, interest and capital gains are taxed at the same rate. As for the Australian mining industry, corporate taxation should not be incorporated in the same way because of two reasons. Firstly: it is foreign owned and secondly; it is a high risk industry which involves long gestation periods with no profits. The same principle of corporate taxation is applied for taxing super profits and since their profits are above a certain threshold, the tax rate is higher. Government also taxes capital income as rent. These rents originate from imperfect competition, and agglomeration externalities which allow the firms to earn an above normal return. Taxing for mining firms is done very efficiently. It won’t be applied on the margin of new firms. If it reduces the value of the firm, it will reflect on share prices and hence, it only reduces the wealth of existing shareholders. (MOOIJ) According to the government, the Government bond rate (GBR) is a fair level of profits. Anything above it is classified as super profits and should be taxed at a higher rate of 40%. Arguments against the Resource Super Profit Tax (RSPT) raise the point that since the GBR is a bench mark for a non risky tax flow, it should not be the same for a risky venture. The government should at least fix a higher threshold level for mining companies profit after taxing it at a higher rate. Though the Government assures that 40% of the losses will be refunded, if the Government is taking a 40% stake in profits and losses, it should also contribute 40% towards the equity or initial capital. This is not the case, however. Mine financing and a 40% share in losses will mean that small investors will find it easier to get the project financed. (Glover) If the mining companies are faced with the RSPT, the overall government revenue will increase initially. This is the main reason for proposing this tax. But in the long run it can have drastic consequences. Companies will transfer their capital to safer locations with less tax overheads and more stable tax structure. This will cause a decrease in the revenue. It will also affect the mining industry. Though it will benefit small and marginal mining projects to get easy approval because of the government backing of risks, large mining companies might defer or cancel future operations. This will be a major blow and the overall economic activity of the industry will decrease. (Harry Huizingaa) The taxation of all entities including those generating super profits is also dependent on the Company’s capital structure. The greater the debt to equity ratio, the less the tax that will be levied on it. For instance, for firms that operate in more than one country, like foreign firms that operate mining companies in Australia, more than one type of tax is levied. It might be taxed in both host and home countries unless a tax relief is granted in any of these. In practice, source-level taxation Appears to be more important in affecting leverage than the residence-level taxation levied by a multinational’s parent country. This finding may reflect that parent-country taxes on a multinational’s foreign source income, in practice, can be deferred, in some cases indefinitely. At the same time, corporate tax rates rather than non-resident dividend withholding tax rates appear to matter for leverage. This could reflect that multinationals are able to avoid bilateral nonresident dividend withholding taxes by using conduit companies (Harry Huizingaa). The government feels that the major stakeholders in the mining industry are the mining firms. Thus a reduction of their profits would not cause a negative effect on the overall system. They might presumably be wronged. Mining employs resources, which are both capital and human. If the appeal of the Australian mining industry decreases, their employment and the country’s super profits will decrease. Of course this will not happen overnight because mining firms cannot abandon their operations in Australia. However, this can be a possible scenario in the long run. This is because other countries of the world have lower tax rates and once current operations in Australia end; they might not start new ventures there. (Glover) The mining industry as proclaimed by many. Is the golden goose of Australia? The RSPT will ensure that further advantage of this is taken and the benefit is spread all over Australia rather than being limited to this industry. The revenue collected from the tax can be used to help other industries. The mining industry has flourished not as a solo operator. There were government contributions in developing the industry, if not in maintaining it. New power lines were installed and new ports were built for easy transport and export. Therefore many feel that it is the right of the government to have a share in the generated profits. The government is not doing so for its own sake but also to end the inequality in the society that this industry is generating. (Thackrah) The Case against the RSPT Mining is a high risk industry, with a huge potential to generate high profits and losses. Mining companies routinely invest billions of dollars in exploration. The money is invested to help build their own infrastructure to bring their products to port, and to prepare them for the stiff competition on volatile world commodity markets as price takers. This requires not only the combination of scarce capital and labor resources, but the application of entrepreneurial flair and ingenuity. It is not only a high-capital or a high risk industry. It is also an industry which involves long gestation periods of a decade or more to realize an operating profit. (Novak). In exchange, it is understandable that miners anticipate a reasonable financial return on commercially viable projects to justify their substantial investments. Due to unique conditions in the industry, it is necessary that policy institutions such as taxation remain stable in order to encourage long term investments in the sector. When it comes to the RSPT, it will undeniably contribute to the development of non-mining sectors and the general public. This is ideal from the point of view of domestic policy makers who want to maximize citizen welfare. It will also help make the export market, tourism industry and the foreign student revenue market better. This is because the soaring Australian dollar inhibits trade in the international market. To decide whether the Resource Super Profit Tax (RSPT), should be levied or not, a working of the Australian mining industry and its derivation of profits will have to be analyzed and understood. It is easily the most important sector in an increasingly integrated global economy. Its share in the amount of royalties and taxes it pays is huge. Over the past decade Australian mining companies have paid $80 billion in company tax and royalties. But is it right that the mining industry should face the hammer? Is it the responsibility of those who entered the industry when there was no such tax and who came with the intention of making higher profits, sacrifice all that in the name in the name of Australian citizen’s benefit? One should remember that a majority of mining operations are foreign subsidies and therefore they do not have any concerns in the country besides profits. When the betterment of the host country will be put in front of them, they can justify themselves by showing the amount of royalties they pay. These foreign investors also have the option of moving their assets to safer, more stable locations. Mining windfall taxes is often associated with the flight of capital to other countries. To quote a few: Mongolia introduced a 68 per cent windfall profits tax on gold and copper in 2006, at thresholds significantly below going market prices. The tax led to a reduction in exploration activity, an increase in smuggling of the affected metals, and falling share prices of numerous mining companies. New Zealand started special levies for coal and oil production that subsequently induced capital flight for more than a decade following the repeal of the taxes. (Novak) If this happens the country’s estimated revenue target will never be met and might even decrease. This will stem from both higher tax rates and the lack of trust that foreign companies put in host companies. Mining companies might also shelve or defer their new operations. In fact a few companies have also announced their plans which can have a significant impact on the future development of the mining sector. Some of them are *Santos recently announced that it would defer for up to six months a decision on whether to build a $15 billion liquefied natural gas plant in Gladstone, Queensland. (Novak) *BHP Billiton, Rio Tinto and AngloGold Ashanti, have also announced that they were reviewing the status of selected projects in light of the Rudd government’s RSPT announcement. (Novak) Though the Government assures that 40% of the losses will be refunded, if the Government is taking a 40% stake in profits and losses, it should also contribute 40% towards the equity or initial capital. This is not the case. Therefore the government is getting something for nothing (Glover) The Australian mining industry also provides pivotal support to other industries such as metal fabrication, machine construction and repair, transportation, carpentry, plumbing and other manual services. They repatriate their incomes to their families in towns other than the mining estates. Thus it is beneficial for other regions as well. Novak points out that, a diminution of economic activity in the mining heartland as a result of the RSPT will inevitably flow through to other regions of Australia in the form of lower economic growth and fewer job opportunities. (Novak) Thus in my opinion the RSPT, though it might be justified from the corporate point of view in the short run, is unfair both to the miners and the citizens in the long run. This is because the operations are not owned by Australian nationals but foreign companies. Mining is a highly competitive industry and other countries of the world have lower tax rates for mining goods, for e.g. Canada levies only a 23% tax on extracted goods. Their only interest in the mining industry is in the high amount of profits, and if they decrease, they are likely to move their operations elsewhere. As mining is central to Australian revenue, the country cannot afford to decrease its revenue and royalties and suffer decline in a smoothly running industry. Adam Smith brought to light the key to economic prosperity two centuries ago, when he referred to the role of 'easy taxes' as a key to opulence. The federal government should pay heed to Smith's advice, through a commitment to lower (and decentralized) taxes funded by expenditure reductions. (Novak) Conclusion: The mining industry in Australia is an industry in full bloom. It pays a huge amount of royalties and taxes, though less by percentage but great by amount. To exploit the industry further by levying higher taxes may cause the government and the citizens at large to face the brunt of the loss of the industry’s goodwill. As these play a crucial role in Australian economic boom, the sacrifice of this sector to feed other dimensions of the society would be unfair to mining companies and their stakeholders and may cause the mining downfall. Bibliography Glover. Resource super profit tax. every thing correctly explained. 25 May 2010. 29 September 2010 . Glover, James. RSPT – A Fair Valuation Based on True Value of New and Existing Mines. 12 June 2010. 4 October 2010 . Harry Huizingaa, Luc Laevenb, Gaetan Nicodeme. "Capital structure and international debt shifting." Journal of Financial Economics ( 2008): 81-120. MOOIJ, RUUD A. DE. "WILL CORPORATE INCOME TAXATION SURVIVE?" De Economist (2005): 277-288. Novak, Julie. "The Resource Super Profits Tax and the." June 2010. Perkins, Dr John. Miningtax|the facts about Resource Suoer profit tax. 29 September 2010 . PeterEgger, WolfgangEggert , ChristianKeuschnigg , HannesWinner. "Corporatetaxation,debtfinancingandforeign-plantownership." EuropeanEconomicReview (2010): 106. Thackrah, Andrew. "Australian policy and history." August 2010. www.aph.org.au. 4th october 2010 . Read More