Being introduced in Australia in 2010, the mining tax also called as Resource Super Profit Tax (RSPT), by the federal government of Australia. The main target of this tax reforms is the mining industry. The main reason to introduce resources super profit tax (RSPT) on mining industry is the reducing number of resources extracted from the earth. The other reason given by the bodies is to increase in the share of every Australian in the profit from the resources. Government main idea is to bring mining industry into new tax system as it is believed that mining industry is making huge profits. So by bringing this new tax system, the government has brought many issues of debate between concerned people, especially between government and mining companies. Many mining companies have lost their revenue, with the drop in share prices, just on the announcement of the new tax system. There is still a lot of arguments against and in favour of this proposed tax. These arguments will be discussed in the topics related to RSPT and its developments. Also the reaction of the other people like miners, workers and shareholders of the mining companies are been explained through the theories of regulation and capital market research.
Resource Super Profit Tax and its developments
On 2nd May 2010, the Government of Australia announced a Resource Super Profit Tax (RSPT) on mining tax companies from 1st July 2012 as a part of its response to the Henry review (Dawson 2010). In addition to the usual company tax, mining companies have to pay proposed 40% of this profit tax. Mining tax is mainly intended to replace the old tax system. Under this new tax system, company tax will be reduced to 28 percent from present 30 percent. Any royalties paid by mining companies to state government will be refunded by federal government. In the Business Day, the working of mining tax is calculated in a following manner:
A tax free allowance of 6 percent is permitted to be deducted from existing earnings of the mining companies. This is called as RSPT allowance.
For the first five years, mining companies are also allowed to deduct an accelerated rate of depreciation.
The balance amount is taxable at 40 percent called as the Resource Super Profit Tax (RSPT). And after that the remaining amount will be taxed again at 28 percent as company tax.
In theoretical way, RSPT is designed to be a tax on profits over and above those earnings which are deemed to be 'ordinary'. Income earned from resource exploration, development and extraction after deducting costs where costs are defined to include a normal rate of return on capital invested. The main purpose to impose RSPT is to enable government to collect some payments in return for the extraction of the country`s resources. The new tax system will apply to both old and new projects.
Still much of the RSPT operation detail is not fully finalised and is subject to further consultation. Dawson (2010) mention that RSPT will be applicable on all those entities which are directly involved in the exploitation of the Australia`s non-renewable resources. Generally all non-renewable resources are to be taxed under this new proposed system except Petroleum Resource Rent Tax (PRRT).
The government has set a time limit to commence this tax system till 1st July 2012 in a following manner:
May - June 2010 Formation of Resource Tax Consultation Panel
Initial consultation, with stakeholders on target, regarding:
Major outstanding parameters.
Transitional issues
Identification of industry issues.
July 2010 Extensive consultation and issues paper
Treasury issue paper publication
Technical design element classification
Submission of stakeholder
Late 2010 to Final design paper and draft legislation
Mid 2011 Design details
Comments on details implementation and legislation
Late 2011 Introduction of legislation into Parliament
1 July 2012 Tax system commences
Political Cost Hypothesis and Reasons for Resource Super Profit Tax
A political cost hypothesis is a type of positive accounting theory around which predictions are organised. Where positive accounting theory makes good predictions of real world events and translates them to accounting terms, normative theory recommends what should be done. There are three types of hypothesis of positive accounting theory, bonus plan hypothesis, debt covenant hypothesis and political cost hypothesis. Political cost hypothesis is the assumption that companies will tend to show their profits lower by using different accounting methods. By doing so the firm does not caught any attention of politicians or public. Government or public usually have an eye on high profit making companies. So by lowering profits, companies does not get caught any attention of public and government. Managers of companies, who face large political costs, are likely to choose those accounting procedures that reschedule current earnings to future periods. Due to high profitability, firms have to face new taxes or regulations because of political heat. Galligan Key (1997, p 309) examines the role of accounting information in the political process surrounding regulation of the cable television (TV) industry. In referring to Watts and Zimmerman (1986), Galligan Key examines the theory of political costs states that to extent a firm is subject to potential wealth transfers in the political process, its management is more likely to adopt accounting procedures that reduce the transfer.
Using the national accounts basis for Australian industry as a whole, the average tax paid by other businesses is much higher than those paid by mining sector. Mining sector averages just at 19 percent of the total tax contributions. So in comparison, mining industry itself represent a smaller share of profits than for Australian industry as a whole. Mining sector is different from other industries because miners are given exclusive rights to access those resources that belong to the community or whole country. So everyone would expect it to be taxed heavily or that mining sector should pay more taxes. But surprisingly, it is just opposite to that. So from past figures, it`s clear that mining sector is not paying its fair share of taxes and that reinforces the need for super profit tax.
Godfrey et al (2010, p. 378) states that accounting plays a role in political cost allocation because accounting numbers are often seen as evidence of a 'crisis' that politicians and other parties 'solve', thereby promoting their own interests. The firms which are politically sensitive are likely to understate profits. There is always a risk of removal of subsidies or the introduction of new taxes on the firms with higher rate of profit earnings. So firms have incentives to use methods to reduce profits to remain unnoticed in the eyes of politicians, publics and employees.
The Resource Rent Tax is recommended by Henry Tax Review to cover most minerals in Australia and has been adopted by Rudd government as policy. The Australian and State governments seek an appropriate return from the resources as the community owns rights to these non-renewable resources. The last mining boom gave very benefit to Australians. Before the global financial crisis, most people would have been affected by the higher interest rates on mortgages caused by the Reserve Bank`s attempt to make up for macroeconomic impact of the mining boom. And as the global financial crisis passes the mining boom has returned and the government fears that once again the benefits are unlikely to benefit most of the Australians. Australian government is using RSPT as a vital tool for capturing some of the national benefits of these resources and distributing them more widely. In absence of RSPT, mining companies and their owners or stakeholders would get all benefits of Australia`s superior resources. So the government is using RSPT to collect revenues and distribute its benefits to bulk of Australians. Super profit tax may be used on infrastructure or building up as a reserve for a post mining future. As for individual Australian sharing the benefits of super profits, most of them will be benefitted by superannuation or by lowering company taxes that will benefit shareholders.
However, there are few drawbacks of political cost hypothesis:
Such types of public funds often draw a distant line between political parties and ordinary citizens.
Political parties in power often allocate funds among there legislation and it makes more difficult for any other parties to represent.
Often rich politicians got more benefit from such type of funds.
Reactions of various stakeholders to RSPT using theories of regulation
Theories of regulation provide an analysis of potential use of resources and powers to improve economic status of various economic groups. There are three different types of theories of regulation, public interest theory, regulatory capture theory and private interest theory. Government, miners, workers and trade unions are in favour of the proposed new tax system. Opposition, finance sector and the shareholders of the mining companies are against this new tax system. So taking into account different theories of regulation we study the reactions of various stakeholders.
Public interest theory illustrates the situation where government`s motive is to maximise public interest. To achieve this goal government take various steps like eliminating market malfunction, enhancement of resource allocation efficiently and promote social welfare. In this case government acts as an agent on behalf of the general public. Politicians and shareholders can favour such type of theory as it makes them much powerful and can also benefit them financially. Politicians can support this theory as it will open door for accumulating future wealth and shareholders get advantage by creating monopoly type situation in the market. Workers, miners and individual tax payers are not able to get any benefit in such situation. Government makes policies in favour of public interest but there exists certain lobbies which tend to receive more benefits at the cost of public interest. Opposition will always oppose such type of regulations where there is no public benefit.
Next is the regulatory capture theory. Yanhua Zhang (2009) cited that basic philosophy of this theory is absolutely different from the public interest theory of regulation. It proposes that government regulation is effected in order to meet the needs for regulation of industry. Godfrey et al (2010, p. 57) states that although the main purpose of this theory is to protect the public interest, but this is not achieved because in the process of regulation, the regulatee comes to control or dominate the regulator. In this case mining companies have the power to regulate the market in its own manner. Government make rule and regulations which generally suit the needs of the mining companies. Or we can say that industry controls the information needed for regulation. Mining industry, shareholders and finance controllers would prefer such type of theory as that help in regulate the market at their own will. Government, miners, and tax payers might not favour this type of theory as it would not be beneficial for the whole society. As government would not want to play in the hands of mining companies and tax payers would not want that mining companies to accumulate large amount of wealth.
With the dissatisfaction from the above two theories, a new theory emerged as a private interest theory. This theory works in the similar condition of demand and supply as forces operating as in the capital market. In this market scenario, government is the seller or supplier of regulatory programs to raise money for its own purpose and there are many bidders for these programs in the market. Those who bid highest will be the winner. This theory has two advantages, one the highest bidder is mostly the producer group. Second, government is able to exercise its power to their own advantage to raise money. In this case, both mining companies and the government have the advantage. Both the parties are filling each other`s needs. Workers, miners and tax payers are not getting any advantage through such regulations.
Reaction of capital market to RSPT and its development using capital market research
McNamara (2010) described how after the announcement of proposed super-profits tax on 2nd May affected major mining companies. Mining companies have started to halt their mining projects. Share price of mining giants BHP Billiton and Rio Tinto declined rapidly. There major investors from India, China and others have started to pull out of major projects. An Australian miner, Cape Lambert Resources, cancelled its project of iron ore exploration in response to the new proposed tax. Economic analyst's viewpoint is that this proposed tax has brought down market of Australia by one percent since last two days.
To provide useful products and services to the customers it is important for companies to do capital market research as an activity. This systematic approach enables company to increase its profit making abilities. Research on capital markets minimise the risk associated and companies can earn more dividends. The main advantage of capital market research is establishment of direct communication between the companies and customers. Various services provided by the companies can be measured by the customer reaction and satisfaction as a result of capital market research. Thus a company can change its wrong policies and take right steps. A company can have a better chance of getting a good return if it undertakes capital market research before launching a new product. In this manner, a company can minimise its risk. Capital market research can be helpful in gauging exact needs of market and general public.
These type of research should be done as early as possible or before investing in the stock market. Research work involves finding those companies and stock prices that would fulfil the demand of financial situation of the investor. The profile of the company should be studied and gathering the history of the company is also important. Its performance, popularity and history of profits must be analysed before investing in the shares of that company. Long term investments should be made so that enables to minimizes risk and increase profitability.
Opinion on Resource Super Profit Tax
Risk and profit are both inter-related. No investor would like to invest in a project which accumulates low or none profit. No lender or bank would like to give loan on any risky project. Australian investors and some investors from overseas have put a large amount of money into mining projects with no return from it over many years. As now something is coming of now from these projects, government is exercising its power to collect extra money for its own purpose. Having RSPT on mining projects at the rate of 40 percent is not fully justifiable.
Mining projects are not always easy and require a lot of investment. A large amount of risk is involved because it requires lot of searching. And then it takes many years to start getting return from the research findings and its development. When return start coming through, government comes to take extra profit from mining companies. Resources are useless unless we find it and dig it out of the ground. Government`s point of view is that the resources belong to all individuals of Australia and they have right to get its fair amount of share. But the government is not considering the fact that mining projects require lot of capital, labour, human resources and risk. Mining companies already are paying royalties and company taxes to the government. But it is not the mining companies that pay the taxes, it is only in the accounting books. It is the customers, shareholders, workers and the contractors who are burdened with an additional tax.
Shareholders, in particular, when they purchase their mining share, they expect to receive a certain flow of profits. So if the profit stream is now taxed more it will make mining share less valuable. So Australia will not only lost domestic shareholders but many overseas shareholders like Chinese who have interests and shares in mining companies operating in Australia. So to benefit its own population, RSPT is hurting foreign investors. Mining companies are also worried that many other countries can follow suit like Australia.
Conclusion
Resource super profit tax needs a lot of consultation and working to be done. At this point of view, mining tax is not in best interest of mining companies, miners, workers and shareholders. It will have an adverse effect on the Australian economy. Big mining companies have the option to think about shifting projects to African countries. Small and mid-size mining companies may go out of business. With major mining companies winding up there business, unemployment will increase gradually and will affect other sectors of the economy. And in such a competitive global environment, when world is recovering from worst financial crisis, such type of taxes would hit the Australian economy badly.
On the other hand, if we consider the stand of government, the tax will generate additional funds that will benefit other areas of the society. These funds will contribute to the making of new roads, schools, hospitals and for the maintenance of the old ones. Other motive behind is to give benefit to the small mining companies. As only big mining companies have to pay RSPT, it will provide additional incentive to the smaller companies. Big companies can still earn huge earnings after paying the proposed tax. Government`s view is that it will not affect the Australia`s competitive edge in the international market
