5.1
Throughout this inquiry, the committee has heard from various
stakeholders and experts who not only expressed misgivings about the
development and operation of the MRRT specifically, but also suggested it was
neither efficient nor appropriate for the Commonwealth to impose a rent-based resources
tax.
5.2
These stakeholders and experts generally emphasised one or more of
the following points:
- either in theory or application (or both), rent-based resource
taxes are not nearly as efficient as proponents would claim;
- the state-based royalty system is not as inefficient as
detractors suggest;
- even if rent-based resource taxes are more efficient than
royalties, this efficiency is lost in the MRRT because the design of this new
tax is overly complex and is applied on top of (rather than in place of)
existing state royalty regimes; and
- the imposition of a resource rent tax by the Commonwealth is an
intrusion into what has traditionally been a state area of responsibility,
consistent with the states' ownership of mineral resources.
5.1
Asked how Australia's taxation of mining companies compared
internationally, Professor Quiggin suggested that miners were 'getting a very
sweet deal' in Australia:
We are much more generous to the mining companies. A number
of other developed countries, of course, have asserted complete public
ownership over those minerals, as well as many others. I think a relevant
consideration here is the continued threats by the mining industry that
activity will move overseas. The nominated countries typically have been
places, first, that do not provide anything like the range of public goods to
the mining industry that Australia does—not only, obviously, things like
infrastructure but also other benefits of a secure legal framework and so
forth—and then many of those countries have sought to raise taxation along
similar lines.[1]
5.2
In contrast, the mining companies that the committee heard from during
the inquiry, and the peak mining industry bodies, strongly refuted any suggestion
that miners in Australia were not already 'paying their fair share' of taxation
or contributing to the economic prosperity of the nation.
5.3
For instance, the MCA told the committee that it did not consider the
MRRT necessary in order for all Australians to be sharing in the benefits of
the mining boom. On the contrary, the benefits of the mining boom, according to
the MCA, were already washing through the Australian economy, providing both
direct and indirect employment, and 'sustainably contributing to the social and
economic welfare of all Australians before the advent of this new MRRT tax.'[2]
5.4
In answer to a question on notice, MCA expanded on the benefits on
mining to the economy and employment:
BREE research shows that over the period of the mining boom,
between 2002-03 to 2011-12, Australia performed better across a range of key
economic variables compared with the preceding eight years. Recent RBA
research finds that resource economy accounted for around 18 per cent of gross
value added in 2011/12 and around 10 per cent of total employment given the
flow through of mining to business services, construction, transport and
manufacturing.
The MCA KPMG Analysis of the Changing Resident Demographic
Profile of Australia’s Mining Communities (February 2013) shows that there is
higher full-time employment in mining regions – 66 per cent compared with 58
per cent across regional Australia in general.
All but two mining regions recorded an unemployment rate
below the national unemployment rate (5.2 per cent) and the regional Australian
unemployment rate (5.4 per cent)
Mining represents 17 per cent of the total workforce in
mining regions compared to 2% nationally.
Around 5 per cent of the minerals workforce is comprised of
apprentices and trainees (Training and Education Activity in the Minerals
Sector, NCVER, 2013).
Further, the mining industry is also the biggest employer of
indigenous Australians, many in regional and remote areas.[3]
5.5
The MCA also noted that Deloitte Access Economics had calculated the
cumulative total of revenues from federal company tax and state royalties paid
by miners at more than $130 billion since the start of the millennium. MCA also
told the committee that annual tax and royalty payments from the minerals
sector had, in fact, risen fourfold since the start of the mining boom. MCA
added that, contrary to claims made during the 2010 mining tax debate, 'the
industry's effective tax rate has actually risen in recent years and it is at
the Mount Everest of comparable international rates.'[4]
5.3
In his letter to this committee, the Queensland Treasurer and Minister
for Trade, the Hon Tim Nicholls MP, suggested that the MRRT represented ‘a
federal incursion into what has traditionally been a state revenue base and a state
responsibility.’[5]
5.4
The Queensland Treasurer pointed to the broader problem of how states
would raise the revenue they required given that the ‘encroachment by the
Federal Government into revenue bases traditionally held by the states is not
sustainable, particularly where, as in this case, inadequate compensation is to
be made available to the resource states.’[6]
5.5
Western Australia Treasury made a similar argument, telling the committee
that the MRRT had destabilised federal financial relations. With regard to
Commonwealth threats to remove funding from states if they exercised their
prerogative to raise royalties, Western Australia Treasury told the committee:
Any attempt to prevent increases in mining royalties in
favour of maximising Commonwealth MRRT revenues would undermine state
sovereignty and capacity to achieve fairer returns to their communities—those
communities that own the mineral wealth. It would also raise serious concerns
about the effective operation of the Australian federation if that were the
case.[7]
5.6
Summarising Western Australia’s concerns, Western Australia Treasury
told the committee that:
...resources are constitutionally vested in the states.
Royalties are payments to states for the extraction and removal of those
resources and they, rightly, should be payments to the states to compensate the
community for the loss of those resources.[8]
5.7
Professor Garnaut told the committee that resource rent taxation in
Australia needed to be considered as part of a broader reconsideration of
federal financial relations, and in this connection stressed that both the
Commonwealth and the states had legitimate revenue raising powers in this area:
The Commonwealth has a completely legitimate taxation power
in relation to corporate income. The states have a completely legitimate power.
It is not a question of one level of government usurping powers from the other.
There are two legitimate constitutional heads of legislative authority, and we
have to talk about the coordination of those.[9]
5.8
Any discussion of a rent-based resource tax in Australia, concluded
Professor Garnaut, would need to take place within the broader context of a
more fundamental reconsideration of federal financial relations. By
implication, he suggested that the current MRRT had not been negotiated with
regard to the broader context of federal financial relations, and therefore the
introduction of the tax had simply invited additional complexity and
instability into Australia's approach to resource taxation and, more broadly,
financial relations between the Commonwealth and the states.[10]
Is the MRRT a simpler, fairer way to tax resources?
5.9
When the RSPT was first announced on 2 May 2010, the government claimed that
the new tax was part of a long-term tax plan to ‘make the tax system fairer and
simpler for Australian working families and households.’[11]
In light of the original intent underlying the government’s introduction of a
rent-based resource tax, the committee considered in the course of the inquiry whether
the MRRT had, in fact, made Australia’s tax system simpler and fairer.
5.10
Not surprisingly given his aforementioned views on the complexity and
instability created by the MRRT’s interaction with state royalties, Professor
Garnaut told the committee that he did not believe that the introduction of the
MRRT had made Australia’s taxation system fairer or simpler.[12]
5.11
While emphasising that the MRRT was a vast improvement on the RSPT, the
MCA told the committee that the tax as implemented was very complex:
In a general sense, rent taxes are complex. Secondly, the
accounting concepts are quite different when you are working through a rent tax
or a superprofits tax as distinct from a normal profits tax. In particular the
key point of difference is that they are a project by project consideration.
[...] So there is quite a difference in the way rent taxes have to be accounted
for on the books and the way they are considered in terms of the tax
liabilities, and that adds to the overall perspective of tax compliance.[13]
5.12
Professor Guj also indicated that, even were it not for the
complications that arose in Australian resource taxation because of Australia’s
federal arrangements (discussed below), the inherent complexity of applying a
rent-based tax to resources might count against its application:
The problem is that it works with oil and gas because the
magnitude of the interests involved justify the cost of complexity.
In mining, we are looking at 385 small, piddling mines in
Western Australia. They have been lumbered with a system that is far too
complex. So there is a price to complexity. I do not say that you should not
tax complexity, but by all means you need to have it if the benefits of
complexity overcome the price...[14]
5.13
Professor Guj subsequently added that while it may be appropriate for
governments to tax rents:
...if you want to draw up true [rent-based] instruments,
which are very complex, which imply high compliance costs and so on, there have
got to be overwhelming benefits. At the moment, I do not see that that balance
has been achieved with the MRRT as formulated.[15]
5.14
The complexity of the MRRT was further underlined by other witnesses
during the inquiry. AMEC, for instance, told the committee:
We have been sitting on an ATO liaison that was established
towards the end of 2010 that has the sole purpose of looking at the detail and
design aspects of the tax and trying to work out administrative procedures that
will lessen the impact, the costs and ease the whole process of the
administration of the tax. That group is still meeting. It has got a whole
suite of working groups that sit within it, and we are still working with that
group today. It is coming up to three years that we have been operating with
that liaison group and the working groups associated with it. I do not know how
many taxes get introduced that need a liaison group from the ATO that needs to
operate for an ongoing period for about three years with a whole subsequent
bunch of working groups to try and work through the administration of a tax. I
have never experienced that before but I think it is indicative of the
complexity of this tax that we all struggle with getting our heads around the
administration of it—and the cost of it.[16]
Is the MRRT more efficient and
reliable than state royalties?
5.15
A number of witnesses to this inquiry maintained that rent-based taxes
are more efficient way to tax resources than resource royalties. However, other
witnesses, including the state governments of Queensland and Western Australia,
contended that their royalty systems were more efficient than the MRRT and
provided a more stable source of revenue.
5.16
Some witnesses spoke in favour of rent-based taxes, at least in
principle. For example, Dr Denniss, while critical of certain design features
of the MRRT, told the committee that he nonetheless supported the idea of a
resource rent tax. He added that the 'vast majority of academic economists
would agree that [a resource rent tax is] an effective and efficient tax base
to have'.[17]
[From] an economist's point of view, the advantage of a
profits based rather than a royalties based approach is that you collect a lot
more tax from the most profitable mines, and of course there are coalmines in
Australia that were producing profitably at $40 or $50 a tonne; they are making
very high profits now. The Henry tax proposal—the RSPT—was aimed at collecting
a lot of tax from those most profitable mines. ... The marginal mine, using the
economist's definition—the last one to go into production—will by definition
pay no superprofits tax because it is hypermarginal. In the scheme of the
entire industry that is a small price to pay. If you efficiently collect, with
no distortions, a large amount of tax from 99 per cent of miners, and one
miner—that marginal miner—is not paying a superprofits tax, then most
economists would agree that that is a small administrative price and a small
equity price to pay...[18]
5.17
Dr Denniss further suggested that a properly designed rent based mining
tax 'also has the very substantial advantage of giving some cyclical revenue
growth.' That is, a well-designed mining tax, combined with a macro-economic
instrument such as a sovereign wealth fund, could potentially ease the
pressures that a booming resources sector has placed on the exchange rate and
non-mining sectors of the economy.[19]
5.18
Asked if state royalties were as flexible as a rent based tax given
royalty rates can change according to price of a commodity (as they do in
Queensland for coal), Dr Denniss responded:
Of course the states can, when they choose to, provide for
changes in royalties. States can intervene in a legislative way. But the
advantage of a super profits tax is that it does that automatically. A super
profits-type tax is an automatic instrument which, once instituted, does the
work itself. Yes, states can come in retrospectively and change a legislative
instrument but I would not describe the royalties as being as flexible as a
super profit tax.[20]
5.19
Other economists told the committee that whatever the theoretical
advantages of resource rent taxation relative to resource royalties, the MRRT
failed to realise those advantages, not least because of the way it interacted
with state royalties.
5.20
For example, asked if the MRRT was an economically efficient tax,
Professor Guj suggested that if it was viewed in isolation – that is, if it was
the only tax on resources, rather than a tax on top of royalties – then it
might be considered slightly more efficient than royalties. However, Professor
Guj also indicated that considered in light of its interaction with state
royalties, the MRRT in its ‘current formulation would not in my view represent
an improvement.’ Questioned further on this point by the committee, Professor
Guj added:
If you were to ask me whether I think the resource rent tax
system would be an appropriate way of taxing resource rent, in an ideal
environment—perfect market, perfect information, complete knowledge of where
mining resources are and so on and the capacity to adjust the normal rate of
profit to the risk of individual projects—my answer would be yes, and you would
find that most economists would answer that way. The system we have put in
place is not that type of system.[21]
5.21
The state governments that this committee heard from during the inquiry
challenged the very idea that royalties were inefficient, and underlined the
simplicity of royalties relative to the MRRT. According to the Queensland
Treasurer, the estimated cost of administering state royalties in Queensland
had been approximately $2.1 million in 2012-13, and it was estimated that $2.2
billion in royalty revenue would be collected in 2012-13. He contrasted this
with the MRRT, arguing that it had been estimated:
...that he additional cost of implementing and administering
the MRRT and extended petroleum resource rent tax to 30 June 2013 exceeds $50
million. These figures do not include further costs borne by the Australian
Government in developing and revising the Resource Super Profits Tax and the
MRRT, or the costs borne by industry participants, states and other relevant
stakeholders in understanding and negotiating the workings of each iteration of
the resource rent tax.[22]
5.22
Western Australia Treasury, meanwhile, challenged the suggestion by
supporters of rent-based resource taxation that royalty systems are an
impediment to exploration and investment in the resources sector:
[Royalties] are a key feature of virtually every successful
resources economy and the Department of Mines and Petroleum regularly advise us
that the royalty system has not in any way impinged upon exploration activity
or resource project development. As we have seen in recent years, the
development in Western Australia has been spectacular, with all of that
occurring against the backdrop of a comprehensive ad valorem royalty
regime. Indeed, since the current royalty regime in Western Australia was
introduced in 1981, the value of the state's mineral production has increased
from just $2 billion to $82 billion in 2011-12. In light of this fact, it is
very clear that the assertion that royalties do not support growth in the
resource industry is false. More significant issues for resource project
developers are the overall taxation system, access to quality mineral
resources, infrastructure, low sovereign risk, access to a skilled workforce and
a stable government.[23]
5.23
Western Australia Treasury also noted that the claimed efficiency merits
of the MRRT over ad valorem royalties has been challenged by independent
experts:
Indeed, the GST distribution review's final report noted that
estimates in the Henry review report about the inefficiency of ad valorem
royalties are highly sensitive to the assumptions used and that, if higher
commodity prices were assumed instead, the portrayed distortion caused by
royalties would be found to be much lower.[24]
5.24
Both the Queensland Government and the Western Australia Treasury also
emphasised that the MRRT did not provide the same level of revenue stability as
state royalties.[25]
5.25
Professor Fargher noted that because of their long experience with royalties,
states had a better information base than the Commonwealth would have had in
designing the MRRT.[26]
5.26
Professors Pincus and Ergas challenged the idea that royalties are more
distorting than the MRRT, and argued that:
...much of the burden of royalties is born by foreigners in the
form of higher world mineral prices which benefit the Australian economy. This
terms of trade benefit offsets most of the damage to economic efficiency that
royalties would otherwise cause.
5.27
Professors Pincus and Ergas also argued that the 'MRRT discriminates
against risky projects to an extent that royalties do not.[27]
5.28
In his submission, Professor John Rolfe noted that not all royalties are
created equal – whereas royalties based on production volume may not capture
resource rents, ad valorem royalties, which are based on a percentage of
the resource value, automatically adjust when values vary. There is even less
difference, he continued:
...between a resource rent tax and specialised types of royalty
arrangements. Under a progressive ad valorem system the rate charged
increases with the value of the minerals, effectively capturing a higher
proportion of the revenue (and profits). In Queensland there is already a
multi-tier system of royalties for coal, and a variable rate system (between
1.5% and 4.5% on other minerals). Under a profit-based royalty system (as
applies in the Northern Territory) the royalty rate to be applied is based on
an estimate of the net value of a mine’s production.
In summary then, the theoretical efficiencies that are often
used to justify a resource rent tax are largely overstated. Royalty systems can
be designed that provide some flexibility in relation to resource prices on the
one hand, effectively changing marginal royalty rates in line with changed
prices and profits, at the same time as providing greater certainty about
payments from industry to government and avoiding marginal low profit
operations. While resource rents are theoretically more efficient than
royalties in economic terms, a range of practical issues limit those benefits.[28]
5.29
Professor Rolfe also challenged the idea that super profits could, in
fact, be taxed without removing incentives to operate:
Under certain assumptions about having a closed economy and
very good knowledge about available resources and future costs and prices,
these arguments are valid. However, in an open economy with imperfect knowledge
and large fluctuations in costs and prices, it becomes very difficult to
identify ‘super’ profits from ‘normal’ profits. In reality, some mining
ventures are very risky, and can only be justified if very large profits may be
possible. ... In the Australian situation where the extent of the resource base
and opportunities for new development are not well known, a resource rent tax
such as the MRRT will act as a drag on resource developments.[29]
5.30
Mr Philip Kirchlechner, Director of Iron Ore Research, argued that flaws
in the underlying theory of rent, rather than specific design features of the
MRRT, explained the lack of revenue it has raised. Specifically, Mr
Kirchlechner suggested that:
The theory of rent may be a useful intellectual device to
illustrate the idea of super profits – excess profits derived from sheer
manipulation or exploitation rather than contribution – but in practice it is
extremely challenging, or even impossible, to quantify them. The difficulty of
identifying rents clearly and separating them from returns to other factors of
production has been recognized even by early proponents of rent taxation.[30]
5.31
Mr Kirchlechner also added that the economic rents that are usually
associated with mineral deposits are not really rents at all, as ‘if you tax
them you would remove incentives to explore and to develop new technologies to
exploit hitherto uneconomic resources.’[31]
5.32
A broad range of witnesses told the committee that the interaction
between state royalties and the MRRT was problematic, and created new
complexities and inefficiencies, both in terms of resource taxation and federal
financial relations more broadly.
5.33
The MCA emphasised to the committee that the MRRT was effectively a
'top-up tax' – that is, a tax on top of state royalties and company income tax,
not tax reform. As Mr Hooke told the committee:
While the MRRT goes some way in addressing [the flaws of the
original RSPT] in better aligning the design with the concept of a resource
rent tax, it still remains devoid of any complementary reform of state and territory
royalties as initially proposed by the Henry review.[32]
5.34
The state governments that the committee heard from were highly critical
of Commonwealth attempts to prevent the resource states from raising their
royalties.
5.35
Western Australia Treasury, for instance, pointed to the contradictory
nature of, on the one hand, the Commonwealth insisting that Western Australia
does not raise its royalty rates, and on the other, a horizontal fiscal
equalisation process wherein the Commonwealth Grants Commission actually
requires Western Australia to recover a national average royalty rate in order
to avoid penalisation in the GST distribution process.[33]
5.36
Western Australia Treasury characterised Commonwealth insistence that it
not raise royalties, and threats to take money from Western Australia in other
ways if it raised royalties regardless, as ‘financial bullying’:
There are many financial flows to the states outside of GST
distribution. They can be in the form of co-contributions to major
infrastructure projects, for example. The implicit threat is if we were to
exercise our state rights in terms of ensuring an efficient and effective
royalty regime, and if that compromised the Commonwealth's financial position
through MRRT, we would benefit less out of those processes.[34]
5.37
Professor Garnaut told the committee that while he believed a resource
rent tax would be more efficient than state royalties – on the basis that
royalties undermine the profitability or even deter marginal projects – he also
argued that the retention of royalties meant 'that the advantages of the PRRT
for encouragement of complete economic utilisation of marginal ore projects are
not available within the MRRT.'[35]
5.38
Noting the inefficiencies created by the royalty system, Professor
Garnaut told the committee that all the problems of the state royalty regimes
remained in place with the introduction of the MRRT, and 'to the extent that
the states have been raising royalties, will have been exacerbated.'[36]
5.39
The Isaac Regional Council suggested that, to be successful, the MRRT
would need to 'connect with and compliment [sic] the state's royalties
systems.'[37]
5.40
Dr Denniss allowed that while there might be a role for some royalties
in a well-designed resource taxation scheme, the current interaction between
the MRRT and state royalties gave states an incentive to 'take advantage of
fiscal federalism', which 'is not good for anybody in the long run and
potentially not even for the people pushing for it.'[38]
5.41
When it was suggested to Dr Denniss that state royalties were a
legitimate revenue stream for the states, given their ownership of resources,
he responded:
I agree it is legitimate. I think there is room for improving
the system for everybody. Constitutionally, obviously, there is a legitimate
role. Regarding royalties, there is a difference between a profit and the
royalty for access to a resource. In public debate it is not always obvious.
For example, I can own some land, sell it and make capital gain. It is the
Commonwealth that levies the capital gains tax. They are not mutually
exclusive, I suppose.[39]
5.42
Professor Pincus suggested that the way in which the MRRT and state
royalties interacted could ultimately also affect the level of company tax
collected:
An aspect of the controversy surrounding the MRRT relates to
the incentives it creates for the states to increase royalty rates. Indeed,
although we have not verified this proposition, it is conceivable that the
increases in those royalties could do much to reduce the Commonwealth revenue
take not merely for the MRRT but also in company tax. In other words, the MRRT
could not only itself not raise much revenue for the Commonwealth but it might
reduce its tax take overall if the increases in royalties are sufficient to
reduce company tax payable. Whether this is so or not depends on the precise
order of the taxes that are imposed and the quantum of the effects.[40]
5.43
While some witnesses and submissions suggested that the MRRT could be
improved, others suggested that the best course of action would be to repeal
the MRRT outright. Not surprisingly, the respective positions expressed in
submissions and during the hearings in this respect were closely aligned to
whether submitters and witnesses believed rent-based taxes were efficient and
therefore worth pursuing.
5.44
For example, Dr Denniss told the committee that he believed Australia
was 'better off having the tax than not having one.' The focus, he argued,
should be on improving the tax rather than discarding it, and by this he essentially
meant lifting the rate of the tax and broadening its application.[41]
5.45
In contrast, FMG contended that the MRRT had proven:
...inefficient, discriminatory and administratively
burdensome because of the technical complexity in applying concept from income
tax, GST, OECD transfer pricing guidelines, mining law, accounting concepts and
market valuation principles. It is not substitute for long term strategic and
holistic tax reform and no design could improve it.[42]
5.46
The MCA, meanwhile, suggested that the mining companies negotiated the
MRRT Heads of Agreement because, while they did not believe then or now that
the MRRT was necessary to share the benefits of the mining boom, it had to do
the best it could with 'the hand of cards that we were dealt.' When directly
asked if Australia would be better off without the MRRT, Mr Hooke answered:
Yes. There is absolutely no question that we would be better
off without the MRRT, but that does not detract from our commitment to honour
the agreement. We did not blink. The government did not blink. We will work
with the government of the day. If you are asking me whether we wanted a new
tax, the answer is no. If you are asking me whether we think it was necessary
to take us to the point of Mount Everest on new taxes and even run the risk of
going over the edge, the answer is no. Would we look a gift horse in the mouth
if this tax were to be withdrawn? No.[43]
5.47
Professor Garnaut, meanwhile, suggested that while Australia might
retain some version of the MRRT, consideration of any revised tax would have to
form part of a much larger and more fundamental reconsideration of the current
state of federal financial relations.[44]
5.48
Mr Utting told the committee that while his organisation, the Yilgarn
Iron Producers Association, was happy to help contribute to the improvement of
the MRRT, ‘we see the best-case scenario is to get rid of the tax.’[45]
5.49
The committee considers that the evidence presented during this inquiry
bears out the strong contribution the resources sector has already made to
Australian prosperity before the MRRT's introduction and continues to make
despite the MRRT's obvious failure to generate meaningful additional revenue
for government in an efficient way.
5.50
The committee is satisfied that the resources sector is already 'paying
its fair share' through company tax, state royalties and a whole series of
other state and federal taxes. The MRRT adds an unnecessary, inefficient and
ineffective burden on what remains one of the most important industries for Australia.
5.51
The committee considers that Australia's national interest will be much
better served by ensuring that our tax and regulatory policy settings provide
for a globally competitive environment for mining investment so that the mining
industry can continue to help drive our prosperity, employment and significant
government revenue in the years ahead.
5.52
The committee agrees that the MRRT represents an inappropriate 'federal
incursion' into an area of state responsibility under our Constitution, and one
that has added unnecessary complexity, inefficiency and costs to the Australian
taxation of resources. The committee further notes that the introduction of the
MRRT without any meaningful consultation with the states and territories
represents another broken promise – this time the promise made in the lead-up
to the 2007 election that the incoming government would pursue a new era of
cooperative federalism.
5.53
The committee remains strongly of the view that the MRRT is beyond
repair and should be scrapped.
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