Australia Accounting Tax - Mineral Resource Rent - Essay Example

AUSTRALIA ACCOUNTING TAX: By (Insert both names) (Name of class) (Professor’s name) (Institution) (City, State) (Date) “Does the introduction of Mineral Resource Rent Tax have any potential impacts on the accounting policy choices of mining companies affected by the TAX”? Abstract The Government of Australia established a resource rent tax on offshore deposits gas and oil in the 1987 and from that time it has increased in surplus an additional $1 billion annually in revenue above and over the usual company tax on revenue. By the time it was being established a serious controversy gathered momentum on the proposed establishment of the petroleum resource rent tax (PRRT). On November 2 2011, the government of Australia did introduce draft legislation to the Parliament to impose a Mineral Resource Rent Tax (MRRT) on margins gotten from gas, coal and iron ore, as from July 1 2012. The onshore gas and oil deposits shall face a rent tax within the new PRRT administration which was also established in the Parliament on November 2, 2011. This paper seeks to explore the above raised question; the potential affects MRRT on the accounting policy choices of mining companies affected by the tax. The second of part of the paper is the literature review section; here I will look other studies (secondary sources) in relation to this matter and draw a conclusion as on the probable effects of the introduction of MRRT on the concerned companies. The methods and observations that the earlier scholars have used will be critical to making concise decision. What is apparent is that the effects of (MRRT) have not been documented adequately; as a result the literature review is not wide. The third section of the paper is discussion of the findings of the previous studies and the final part of the paper is the conclusion. The MRRT that has been proposed has faced criticism from some mining firms. Nonetheless, Australia is presently has deficit on the budget and MRRT is seen by the state as a remedy to repaying the debt of the government and to redistribute the tax burden by lowering the rate at which firms contribute income tax. A number of nations for instance, Norway and United Kingdom have applied Resource Rent Tax to increase the revenue of the government from the oil reserves of the ‘North sea’. Literature Review The study conducted by (KPMG) on MRRT established that Rent Tax (MRRT) is multifaceted, its demands on the miners who are affected are debatably protracted and complex. According to one of the largest accounting company KPMG, “though the Exposure Draft legislation has been drafted to be regulatory in its operations, the incorporation of the various principles and concepts will unavoidably imply that miners will be confronted with uncertainty and difficulty in computing their MRRT liabilities”. In spite some of the clarification and changes to the Exposure Draft; it appears to remain a pertinent view of the legislation. This is recognized by Explanatory Memorandum to the proposed law which states: 80% of the mining companies they interviewed confirmed that this appraisal is projected to impose important compliance costs to the taxpayers within the coal and iron ore sectors (an estimated 320 taxpayers). Within the first year of the operations of MRRT, the taxpayers will have to assess their standing base and also adjust their accounting processes. The current compliance costs will go down within medium term and long term. According to the findings of (Carole 2008), the dependence on OECD transfer pricing systems for computing liabilities MRRT raises tricky potential practical issues in navigating and applying the legislation. This is emphasized by both the Federal Court and overseas jurisprudence decision Commissioner of Taxation v Roche Products Pty and the Commissioner of Tax and SNF Australia Pty Ltd. These cases highlight the vexed problem of transfer price setting which is acceptable to the Taxation office of Australia and also certain overseas agencies which collect the revenue. Forrest Andrew, of Fortescue Metals was reported on June 13 2011, to have written to Julia Gillard (the Australian Prime Minister), describing his concerns regarding the proposed MRRT. The Age newspaper indicated that Forrest concerns were; the tax base will be irrationally thin, being concentrated on 320 taxpayers within two resource fields; iron ore and coal. It may be an impulsive tax concern to massive fluctuations relying on the global commodity prices (rendering it inappropriate to finance the current budget commitments the Australian government has made, for instance financing increased superannuation and lowering company tax). And that such deduction offered to the multi-commodity multinational corporations is so huge as to guard them from restrospectivity which they are not likely to make a proportionate contribution to this tax. Miners who have assessable profits of less or equal to $50 million assessable MRRT profits (income less expenditure) within an MRRT year shall be excluded for the payment of MRRT. This is due to the concept that they will get a lower offset equivalent to the sum value of their MRRT liability according to (clause 45-5). The study conducted by Wayne (2010), revealed that, this low profit offset may progressively get rid of profits from $50 to $100 million. The miners which have low profitability could apply a simplified system of calculation depending on accounting practices, however subject to some exclusion. According to him, the threshold is to be worked out having considered affiliated or connected entities. That threshold is an alteration from the initial Government’s proposal and will considerably decrease the number of miners factored in by this tax to an estimated figure of 320, in relation to the Government initial proposal that could have witnessed the MRRT applied to around 2,500 miners. The MRRT miner’s liability annual will decrease to nix by the tax offset rehabilitation. The MRRT is projected at the rate of 30% as oppose to 40% which the existing tax within the PRRT. The loss and profit computations are founded on the assessable revenues minus deductible expenditure minus the uplift losses forward. The uplift element will be a long term security rate in addition to 7 percent. The MRRT may be an expense deductible when working out the taxable income for the purposes of income tax. This has been the existing scenario within the PRRT whereby the PRRT is always a deduction from the assessable revenue in accordance to (44-750), Income Tax Assessment Act 1997. The study by (Martin and Clifford 2009) established the Royalties made contributions to the government and the Northern Territory would be credited versus any liability of MRRT and any surplus payments of royalties would be uplifted and used against future liabilities of MRRT. Thus, any surplus royalties’ contributions are not refundable. The proposed MRRT will apply to coal, iron ore and projects of petroleum. It will also be applicable to coal methane or systems and technologies which will transform coal to products of petroleum. This law will be effective from July 1, 2011; however, the assets market value acquired for investments after May 1, 2010, shall be integrated under the expenditure computations for the MRRT. Discussion The Minerals Resource Rent Tax is levy to the ‘economic rent’ miners get from the resources which are taxable (coal, iron ore and certain gases) once they are extracted from the earth although prior to undergoing any important value add or processing according to Wayne (2010). ‘Economic rent’ is value of return in surplus of what is required to retain and attract production factors within the process of production. The MRRT will be a tax that is project-based; therefore the liability will be established separately for every project that the mining company has had by the end of MRRT year. (Wayne 2010) states that the mining company liability for the MRRT year will be the total of such projects liabilities. The tax is subjected on the mining company’s income less its allowances of MRRT, at 22.5% rate (which a nominal 30% rate, less 1 quarter allowance of extraction to acknowledge the miner’s staffing of specialist skills. The Mineral Resource Rent Tax is a new law on proposal yet to get its accent by the Australian Parliament. It is supposed to replace the Resource Super Profit Tax that is opposed by many mining companies as oppressive. The small mining companies face equal taxation with the already big companies. This minimizes these small companies’ chances of growth in the competitive mining industry both regional and internationally. As a result of the new law yet to take effect, the small companies might be expected to reduce their rate of production until the new law that is favoring them comes into effect. As (Flickling 2011) puts it, the possible transition into the new MRRT law may result in the deferred tax assets on which the starting value of the assets located for the projects can be greater than the required accounting carrying-value. It is more likely to be the case when the new law’s proposal is on its way to take effect. The entities will have difficulties on adopting the market value methodology which is normally used in calculating the commencing value for the base projects which are undertaken by these companies as a whole. For such cases, the government is required to come up with substantive enactments and specify the periodicity of the reporting dates. As a result, there will be the need to come up with built and maintained details that the new model will use when forecasting the required commencing base on the deductions made to the revenues made by these particular mining companies. He found out that the new law provides the likelihood of an immediate material impact on the tax expenses during the transition into the Mineral Resource Rent Tax law. This is expected since the tax rate is most likely to introduce a rather larger portion of differed tax assets. The changes in the estimates of the future taxable incomes will require the reassessment of the profitability on the recovery of the recognized and the unrecognized differed taxes (Flickling 2011). The same case is expected to happen on the ongoing uplifts which are going to be carried forward on the expenditures and royalties, not forgetting the significant non-deductable expenditures done for the MRRT purposes. In order to avoid such cases from happening, there is need to develop some strategies which will anticipate and also manage the uncertainties that might occur in the market as a result of the introduction of the MRRT as a whole. The affected accounting policies of the companies will also need to tackle the project-by-project issues to ensure that they are really ready when the new MRRT law comes into effect. The companies will do this by conducting the valuations and some modeling in order to determine and evaluate the real impacts which the MRRT will have on the financial status of the investors in the country. The affected accounting policies will also have a resultant effect to the financial statement impacts, such as the profits, the balance sheets effects, and also the cash flows. This is basically for the purpose of complying with the financial reporting obligations that the companies will be required to have met when the new bill takes effect come 1st of July. According to (Martin and Clifford 2009), the affected companies will be required to review and evaluate the processes which they will use when capturing and analyzing the accounting-data and also when filling their respective returns. The same plan has to be done on the types of governance. This calls for the review of the legal and the corporate governance aimed at ensuring that the positions taken by the acts of the companies are really defendable and that the same companies are able to fund the payments upon the tax law. The fundamental keys which the companies need to develop while coming up with strategies to be used for implementation will basically be deployed in the identification of the specific timelines for which the companies will use when the challenges in effecting the accounting policies occur as a whole. With the July date just around the corner and the possibility of the bill going through the Senate, the New Year will as a result lead to the need for these companies to focus on the delivery of implementation plans which the companies will use within the stipulated short periods of time. The new MRRT law will also affect the accounting policies of the companies in such a way that they will be required to understand the impacts of the financial statements. Understanding the financial impact is so crucial to the companies especially when it leads to the preparations and the disclosures of some significant issues for all the entities which are affected. For example, in the Australia context, the country’s accounting board called the Australian Accounting Board gave an interpretation that the act of 1003 of the Australian Petroleum Resource Rent Tax, act of 2007 confirmed that Australian PRRT was supposed to be effected as an income tax within the scope of the AASB 112 as Carole (2008) established. The accounting policies of the companies affected will also feel the impact of determining the transitional tax accounting policies as a whole which in itself is a requirement. The deferred tax accounting with the MRRT will be necessary and will thereby be expected to reflect in the financial statements from the periods when such bills will pass through the parliament and thus the need to be substantially enacted. Only when the bills are substantively discussed that the enacted entities will thus, be required to recognize and also measure the financial statements provided for that particular period, on the basis of the deferred tax assets or the deferred tax liabilities. The affected entities will also have to consider their continuous disclosure obligations as stipulated by the new MRRT law. This is independent of whether the provided financial impact of the MRRT is supposed to be disclosed to the market or not. The same case applies when it comes to the comprehension of the volatility of the future tax expenses to be incurred by the mining companies as a whole. The reason for this need of preparedness is for the likelihood of the immediate material impacts on the transition periods from the RSPT law to the new MRRT law. In addition to this, there is also an expectation that there will be a volatile increase in the tax expenses in the near future, especially in the case where introduction of MRRT will cause large deferred tax assets. Conclusion: When the crucial bill is finally passed in parliament and becomes law by 1st of July 2012, the accounting policies of the companies that will be affected will need to come up with effective strategies that will monitor and ensure that they will be able to assess the real impacts that MRRT will forecast on the profits and tax expenses in the first financial reports presented following the enactment of the new law. For the purpose of meeting these timelines, the affected accounting policies of the company will be required to have met the following obligation; For the minimum, the affected companies should be expected to have conducted the high-level valuations or given at least the appropriate estimates when determining the starting base. With the limited valuation experts available, specialist skills will therefore be sought-out within the well advanced levels in order to secure such services. The mining companies will also be required to do the modeling of forecasts on MRRT on project-by-project basis so as to ensure the probability tastings which are available and also specific ways through which the installments may be determined easily (Lindsay 2012). . These companies will also be expected to develop some understandings on the impacts of the effective tax rates on both the periods of transition and after transition. At the same time also, the companies will also be expected do some calculations on the deferred tax balances. The new MRRT bill has a unique feature in that it is a federal tax in its own right. This has a post effect on the affected company’s accounting policies in the essence that it is deductable when determining the company’s income tax liability after the payments have been made. As a result, it therefore impacts on both the tax calculations on accounting as well as the tax returns on the incomes (Australia’s Proposed Minerals Resource Rent Tax Journal 2010, p. 16). Some companies feel it necessary to apply for the different operational models for the different types of taxes. This is because some of the information which will be required for effecting accounting policies may be gathered at a substantive amount of costs as it will be sourced from the different ways in income taxes and also other operational taxes. For this case, it is definite that the Australian Tax Officer (ATO) will look forward to ensure that the MRRT taxpayers properly can manage the tax duty imposed on them and that every company should be able to withstand the intense scrutiny once the law is implemented. For instance, the policies should be specific in its aim to standardize the following key fields; Standardize on the acceptable MRRT revenue identification and the calculation on the methodologies used. Devise standardized cost identification measures as well as calculation methodologies used with the aim of leveraging the project accountings or the activity based models of cost accounting as a whole. Establish a standardized quality assurance reviews, certifications required and also the responsibilities. This phenomenon will also incorporate the level of the required documentation for the purpose of defending the MRRT law positions, including the escalation of the interpretive issues in general. Limitation: The likely effects of the proposed (MRRT) “on accounting policy choice decisions both prior to the introduction of the tax and post introduction of the tax” has not been adequately documented and therefore this an area that requires further studies to consolidate facts and make rational and conclusive ideas. References: Carole N, (2008), Can the North Sea still save Europe? OPEC Energy Review 23: 13-176. Flickling, D. (2011). The Wall Street: Journal on the Australia's Mining Resource Rent Tax Could.145.27-61 Lindsay, H. (2012). The Australian Journal of Agricultural and Resource Economics Society. 56. 244-259.  Martin V and Clifford M, (2009). Resource Rent Taxation as a Basis for Petroleum Tax  Policy by Foreign Governments and its Relationship to US Foreign Tax Credit Policy and Tax Law Journal of Energy & Natural Resources Law 19: 20-162 Graeme.C, (2009). An Optimal or Comprehensive Income Tax? Federal Law Review 4:265-354 Mitch Hooke (2011). Minerals Council of Australia), post MRRT/PRRT announcement: Journal of Mineral Resource Management, 29(2), p263-279. Rob. F, (2009).The state of resource taxation in Australia: An inexcusable folly for the nation? The Australian Journal of Agricultural and Resources Economics 259, 260-325 Wayne S. (2010). Australia’s Proposed Minerals Resource Rent Tax: Journal of the Australasian Tax Teachers Association 2011 Vol.6 No.1.24-171 Read More