Tag Archives: gilswan

I Wonder How Much These “Experts” Pull?

16 Feb

Back in December, your humble blogger published a comprehensive critique of the Green-Labor-Independents’ disaster-in-waiting dubbed the “Minerals Resource Rent Tax”.

Or “mining tax” for short.

Today, Professors’ Carey and Fargher of Deakin Uni and the ANU respectively, have combined their scintillating intellects to do the same.

This will all sound very familiar to regular readers.

From the Age (emphasis added):

Illustration: John Spooner | Source: The Age

Flaws in the mineral tax mean Australia may profit little from its resource wealth.

Could Australia end up with little to show for its mining boom – as an echo of what happened to Nauru once its considerable phosphate wealth was exhausted?

Close examination of the proposed minerals resource rent tax reveals serious flaws that could leave the federal government well short of the forecast revenue. It is conceivable that some large and highly profitable mining companies could reorganise their affairs to pay little or none of the tax.

The first and most obvious shortcoming of the MRRT, in terms of its revenue potential, is that it applies only to coal and iron ore. All other minerals are exempt. But it is the design of the tax as it applies to coal and iron ore miners that could leave the government facing an unanticipated multibillion-dollar shortfall.

The main problem is that the tax is based not on an objective measure such as tonnes of material mined, but on ”super profit” (mining profit less allowances). Profit at the best of times is a highly flexible concept that can allow accountants to apply creative techniques to minimise a company’s tax obligations. With the MRRT, the incentives and opportunities for creative avoidance appear even greater than those applying to company tax.

The minerals tax is not based on audited company profits from statutory accounts, but on a narrow portion of profits from particular mining activities. It requires the taxpayers (that is, the mining companies) to determine the amount of proceeds and costs that relate to these activities.

Ruh roh!

Does that sound familiar?

According to Carey and Fargher, the companies who are supposed to be “taxed” are the ones who will do the measuring (accounting) that determines how much tax they will pay!

That’s exactly like the Clean Energy Future “carbon tax” (see “An OSCAR For The Clean Energy Future”), where the entire scheme relies on “encouraging” the “biggest polluters” to “self-assess” their emissions … and the “audit” procedure by the government is quietly but openly admitted to be nothing more than an exercise in managing the public’s “perceptions” of compliance by the “polluters”.

This reliance on the miners themselves to determine the appropriate proceeds and costs creates a significant incentive to estimate profit from taxable activities in the most tax-efficient manner. For example, the MRRT requires the miners to split revenue between the taxable value earned to the point of producing a stock of coal or iron ore and revenue earned after that point. Transfers within the company also need to be valued. Losses can be offset between operations.

This point yielded a key insight in my detailed critique of the mining tax (see “GilSwan Conned – Mining Tax The Greens’ Pit Of Despair”).

The design of the MRRT actually creates an incentive for the Big 3 multi-nationals to buy out their smaller competitors – including loss-making junior miners and explorers. Why?

Because they can claim numerous deductions against their MRRT liabilities from existing mines, by gobbling up smaller, locally-owned competitors.

In other words, far from “spreading the wealth” of the mining boom, the design of the mining tax will actually help the Big 3 to increase their monopoly, thus sending even more profits offshore.

At numerous points, opportunities exist to reduce revenue estimates and increase costs so as to minimise the taxable profit reported. Volatility in commodity prices could also allow strategic timing of the recognition of revenue and expenses. All these factors, combined with any decline in the underlying commodity price from the record levels seen when the tax was first envisaged, could greatly reduce the expected proceeds to government coffers.

So, too, could the generous and sometimes unconventional allowances built into the tax. There are more than 50 pages of allowances that can be used to reduce a firm’s tax liability. While most allowances have their foundation in generally accepted accounting principles (e.g. royalties paid to state governments or pre-mining exploration expenditure), other are less conventional.

For example, under division 75, miners can choose between the ”book value” or ”market value” of an asset, which will be allocated against revenue over the productive life of a mine in order to calculate MRRT liability. Depreciating assets based on market valuation is not generally accepted accounting practice, yet it is allowed in the legislation. In simple terms, a mining asset that cost $100 million to bring to production might today be worth $350 million if sold on the open market. A miner could use this higher valuation to calculate depreciation, which would reduce the profit subject to the tax.

Business transactions can be complex, and legislation must therefore contain a range of provisions that require subjective interpretation. The mining tax legislation adds a further layer of complexity, which at times defies conventional accounting and can be used to aggressively minimise the amount of tax payable.

Even at this late stage in the process, key improvements might be made if there were full transparency in the revised revenue estimates, the underlying assumptions and, in particular, the ability of the tax office to monitor and collect the minerals tax. It is not surprising that critics have begun to question Treasury’s revenue estimates, which are based on private information supplied by the mining companies that is not on the public record.

Mining companies are entitled to make a profit, but if the nation decides it is also entitled to a return on the exploitation of national resources, then it is important to design a tax that is effective. Once the resources are gone, they are gone for good…

Well done Professors.

Better late than never.

I wonder what a “professor of accounting at Deakin University’s faculty of business and law” pulls?

Indeed, what does a “professor of accounting at the Australian National University’s College of Business and Economics” pull?

One thing’s for sure. The Big 3 multi-national mining companies pulled the wool over Swan’s eyes in their backroom, closed door deal.

Unsurprising really.

Since Wayne Swan’s intellectual power wouldn’t pull the skin off a custard.

(h/t @CaroChristie )

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