Tax news wallops Aussie miners

Australia arguably slipped from being a pro-mining country to an anti-mining one in early May, as the left-leaning federal government there unveiled sweeping plans to change the island nation into one of the world’s highest-taxed jurisdictions for miners.

The dramatic policy u-turn was the centrepiece of the Rudd government’s Henry Tax Review, a comprehensive look at the entire federal tax code unveiled by federal treasury chief Ken Henry on May 2.

Details of the review leaked in the previous weeks proved to be pretty much correct: Beginning in 2012, the Rudd government wants to slap an extra 40% tax on windfall profits — a “rent tax” in Aussie parlance — generated by all operating mines in Australia, on top of regular corporate taxes. Current mines in the country are not exempted, meaning the government is engaging in a bait-and-switch by unilaterally breaking its existing tax agreements with miners.

On the positive side, the review also proposes to lower the corporate tax rate by a couple of percentage points and reduce payroll taxes.

But make no mistake: it’s an attempt at a major tax grab from existing mines in Australia, and a significant power seizure from state governments.

Prime Minister Kevin Rudd’s blunt desire to hike miners’ taxes may have been pushed to the fore by the collapse of political will in Australia to impose his government’s proposed tax on carbon emissions.

Operators of Australian mines already pay about A$21 billion in various taxes and royalties per year, and pay out more than other industries in the country on a relative basis, but this new tax would add an extra A$5 billion or so in mining taxes per year.

Aussie mining titan BHP Billiton reckons its effective tax rate would soar from 43% to 57% under the proposals. BHP and Rio Tinto, with their vast iron ore complexes, and Xstrata, with its large coal mines, will be the biggest losers under the new tax regime, but all miners in Australia suffered a big hit already, with some A$9 billion in market capitalization having been wiped out on the news.

In other immediate fallout, Cape Lambert Resources has just cancelled plans to build a US$400-million iron ore project in the Pilbara region, and the Peabody Energy offer for Macarthur Coal now looks doubtful. More such announcements are likely in the months and years ahead if this new tax isn’t stopped.

That a new tax would put a damper on new mine development in Australia doesn’t particularly faze the Labor party or much of the general population.

Similar to Canadians’ growing ambivalence towards the oilsands megaprojects in Alberta, there has been so much large-scale mine development in Australia over the past decade — much of it by foreigners and with raw product quickly heading to Asia — that many urban Ozzies feel things need to cool off a bit before so many holes are dug that their dear island starts to look like a blasted-out archipelago.

It’s also fascinating to watch the national government turn on BHP Billiton and Rio Tinto, arguably two of the most-successful Australian companies ever, newly casting them as greedy and parasitic entities controlled by evil foreigners.

The tax proposal would still need to pass through the federal Senate, where the Labor Party is just short of a majority. The Rudd government is up for re-election later this year, and if it successfully returns to power with the windfall tax as a major election plank, this would be a strong mandate to push forward with it.

The new tax may prove quite popular with the general population in Australia’s big cities in the southeast, far from the mining states of Western Australia and Queensland, as Rudd has promised that money raised from it would be allocated to pensions for ordinary folk and infrastructure projects.

And on the other side of the debate, the Australian-on-the-street would be listening to unsympathetic figures such as Xstrata CEO Mick Davis, a corpulent South African who pulled in maybe $40 million last year, ensconced in his mansion in Switzerland, complaining about Australia’s too-high taxes.

One of the biggest winners coming out of this will be Vale, whose vast portfolio of non-Australian iron ore assets suddenly looks far more attractive than BHP’s and Rio Tinto’s in Australia.

Another is Canada, with its relatively low tax regime and broadly welcoming attitude towards mining, especially some of those daunting iron ore projects in northern Quebec, Labrador and Nunavut that now make a lot more sense to develop.