Australia’s mining fraternity is still basking in the era of entitlements but continues to talk up its contribution to the nation’s coffers by conflating company tax payments with royalties.
The latest PR offensive from the Minerals Council of Australia is a report it commissioned from Deloitte Access Economics which puts the miners’ “contribution” to Australia at $22.7 billion last year.
“Deloitte Access Economics estimates the total tax burden on the minerals sector at $22.7 billion,” says the introduction. This figure, however, includes $10 billion in royalties. Royalties are not tax.
The document is cleverly worded. Tax and royalties are analysed separately within the report but the attending spin from the Minerals Council does little to dispel a widespread confusion that royalties and tax should be viewed as more or less the same thing.
Royalties are a cost of the resources extracted from the earth and are paid to Australian state governments representing Australians as owners of those resources.
Even Deloitte Access director Chris Richardson conflates the two in his covering letter to the Minerals Council:
Estimated company tax, MRRT, carbon tax and royalties expenses for the minerals sector
Please find attached our report presenting and analysing elements of the tax paid by the minerals sector.
We hope this analysis proves useful to the MCA”
The public needs to be educated that royalties are not an industry “contribution”. The resources that miners acquire are owned by Australians. If mining companies wish to make money out of extracting, processing and selling resources then, in layman’s language, the royalties are the market price paid to Australia for the transfer of ownership of those raw materials. They are a cost of the miner’s production. Their situation is no different to Ford buying the steel (whether local or imported) required for the cars they used to make here before the mining boom.
The issue is not about the market price of the raw materials that either Ford or miners use in manufacturing their products. Does Ford classify its payments for steel and rubber as a tax burden?
It is time to do away with this tactic lumping royalties with income tax as a “tax burden”. The issue for public debate should be about whether or not companies, including mining companies, are paying the correct amount of income tax on the profits they make. The indisputable evidence is that many companies, particularly multinationals via their “transfer pricing” scheme, are not paying their fair share. More on this later.
It doesn’t matter whether the royalty price or cost of the raw material is based on volume, weight, a percentage of profit or some other measure. The purpose of a resource royalty is to compensate the owner of the resource for its removal and consumption by the mining company. Even if the calculation is based on some form of profit measure, it is not a tax on profit. It is effectively a form of market value pricing of the raw material.
Delving further into the Deloitte data, what jumps out are these lines: “On average taxable income tends to account for about 66 per cent of the ABS (Australian Bureau of Statistics) measure of profit. Hence in ‘normal’ times this is an appropriate share to expect.
When times are good, taxable income tends to grow more slowly than profit.
When times are bad and profit is falling, taxable income tends to fall quicker than profit, as companies use past tax losses to reduce their tax liability.”
This appears to suggest that the mining sector pays tax on 66 per cent of its profits, which is an effective tax rate of 20 per cent. The corporate tax rate in Australia is 30 per cent. It is telling that Deloitte finds the miners’ taxable income tends to grow less when times are good and fall more quickly when times are bad.
This is the upshot of the likes of allowances for accelerated depreciation and exploration.
Looking to the breakdown of “Estimated tax payments, minerals sector”, Deloitte puts a total number of $22.7 billion for 2013-2014. Rounding off, royalties make up $10 billion of this, company tax $12 billion and MRRT and carbon pricing $170 million and $573 million respectively. Note the pitiful contribution from MRRT.
Overall, the Minerals Council says mining accounts for 10 per cent of Australia’s GDP. Assuming Treasury’s estimates for Commonwealth revenue of $374 billion for this year however – and stripping out royalties from the Deloitte numbers – the tax contribution of miners to government revenue is 3.4 per cent.
The Minerals Council puts the contribution to Australia’s corporate tax base at 25 per cent. We only get to 19 per cent – using Deloitte’s $12.7 billion tax number on Treasury estimates for corporate tax of $68 billion (stripping out MRRT and carbon it is 17.6 per cent). Still, 19 per cent is a big number and there is no denying that mining is a critical part of the Australian economy.
It is indeed a vital part, and a large contributor to our presently high standard of living, though the contribution in employment terms is far less than, say, the retailing sector. And it should be born in mind too that much of the huge profits of recent years have made their way overseas in dividends and interest payments. Australia’s biggest three miners BHP, Rio Tinto and Glencore are predominantly foreign-owned.
The Minerals Council spin on the subject of its contribution also ignores the “corporate welfare” of assorted tax concessions, rebates and grants. “Look how much we pay!” they cry while being conveniently mute on the matter of “Look how much we get”.
Think tank The Australia Institute recently analysed the last six budgets from each state and territory and found at last $17.6 billion in assistance for the mining sector (this during the biggest resources boom in history).
Without including water use or state rail and port infrastructure used by miners, TAI estimated $4.5 billion in subsidies last year via the likes of diesel fuel rebates, and deductions for exploration and various tax breaks.
“The mining industry has the lowest rate of corporate tax because it has so many tax concessions,” said one of the authors. “The average is about 21 per cent, the mining industry only pays 14 per cent.
Again, it serves no purpose to downplay or deny the contribution of the mining sector but, when this type of report is issued, the media tends to reproduce the spin in the press release or the introduction without paying regard to the detail, and especially the things which are omitted.
On page two of the Deloitte report they say iron ore royalty estimates have been reduced due to the commodity price downturn. A downturn will eventuate in time but the future tends to be unpredictable.
When times are tough, miners sometimes engage in a process known as “high grading”. Instead of sticking to the mine plan (designed to maximise the total value of the ore body covered by a licence), senior management can be tempted to keep their salary and bonus packages on track by focusing on high-grade ore extraction. Such a strategy will entail a lower processing cost or higher yield for the same cost.
High-grading can be legitimate, but the risk is that it may also destroy a company’s ability to recover lower grade ores in the future. Auditors never check on whether values of recoverable reserves have been altered by the change in strategy. More ore ends up getting sold at lower prices, but planned profit, as promoted to analysts, is kept on track.
By the time this high-grading becomes evident the perpetrators have often moved on or retired. Shareholders are left with inexplicable reserve and asset write downs while state governments are dudded on their total long-term royalty entitlements.
Moving along to Deloitte’s methodology for company tax estimates, on page four of the report
the ABS measure of profit excludes costs not directly associated with the operations and the upshot of any effect of revaluation of inventories. Debt financing costs are therefore excluded. Interest is deductible for tax but is unlikely to account for the whole of the 34 per cent difference between the two (this relates to Deloitte’s estimate that “average taxable income tends to account for 66 per cent of the ABSmeasure of profit”.
What is missing is any analysis of transfer pricing. This would have been really useful information. None of the relevant authorities seem to be aware that the price Australian companies are allocated is substantially less than the true market price. As a result, Australians miss out on both income tax and royalties from this class of Minerals Council members.
The real issue in this debate about lifting or leaning should be about whether companies, including mining companies, are paying the correct amount of income tax on the profits they make. And whether those profits are reputable or mischievously manipulated lower so as to avoid tax.
The evidence suggests that many are not. The evidence suggests that many mining companies are engaged in manipulating profits they disclose locally by engaging in transfer pricing, a practice that is specifically designed to denude the Australian Government of its income tax revenue entitlements by reducing the amount of income they declare in Australia and overstating the costs they incur in Australia
The billions in missing income usually ends up in either tax havens or low-tax countries. The extra costs on the other hand more correctly belong to either: 1. these same tax havens or low tax countries where the missing income ends up, 2. the group’s other operations in low tax countries or, 3. head office, as shareholder costs of managing the group’s portfolio of investments.
The selectively quoted GDP figures do nothing to dispel the nature of this monumental problem for government.
In its press release, the Minerals Council deploys its usual ad hominem rhetorical tactics tailored to shoot down any criticism.
“These numbers comprehensively puncture the wall of sound from the Greens and some commentators determined to talk down mining’s contribution to Australian living standards,” says the press release.
The insults are a smokescreen. The reality is that many large mining companies are “leaners” not “lifters”. The same applies for many large multinationals which operate in other sectors.
As for the Mineral Council’s ten per cent of GDP metric, GDP is a measure of the market value of what a country produces. It is not a measure of the profits made by the people and companies that produce the goods and services. The figures which the Council has selected for quoting are perhaps a better indicator of the impact the mining boom has had on non-mining sectors (which employ the majority of Australians).
Mismanagement of the mining boom is responsible for the high Australian dollar, which in turn has made other Australian produced goods and services too expensive and destroyed the former profitability of those non-mining sectors. Why quote misleading percentages when a table of numbers or a graph might give the real picture? The answer is clear. This is an effort to swing public opinion behind a sector whose operators often do not pay their fair share.
It is a PR offensive to dissuade policymakers from exacting a fair share. Rather than demonstrate that the MRRT (which in its current form was specifically designed by big mining companies to collect next-to-nothing) is a failure, perhaps these same figures also indicate that the mining boom will not have been as good for “Australians” and it ought and that Australians might have been better off for the government to have kept the MRRT in its original form.
The outcome might have been – rather than soi disant generous “contributions” from the resources industry – a more prosperous manufacturing and services sector which employed wealthier tax-paying Australians, in meaningful careers, supporting the same, if not better, health, education and infrastructure services.
Smokescreens aside, the reality is that the majority of mining companies, particularly multinationals, are engaged in a range of tax avoidance practices. They are not paying the full amount of income tax they should be paying. In budget speak they are still basking in the age of entitlement. They are not doing their share of the heavy lifting and are leaving the burden to those least able to afford it. The tax system is broken and most Australians would appreciate a fairer and more predictable tax environment.