Australian Mining Tax Deal Favours Large Firms

by Mary Swire, Tax-News.com, Hong Kong

14 July 2010

In a presentation to a committee of the Australian Senate, Fortescue Metals Group said that the proposed minerals resource rent tax (MRRT) appears to favour the bigger companies which have assets that sit outside of the new tax.

Speaking before the Committee, Fortescue’s Chief Financial Officer, Stephen Pearce, said the company was unable to determine the full impact of the proposed new tax on its operations as it had not seen the details of the confidential heads of agreement signed by the government with BHP Billiton, Rio Tinto and Xstrata.

“Fortescue is a single commodity company,” he pointed out. “We only mine iron ore. Compared to the multi-commodity, multi-national companies which negotiated the MRRT, we have no other minerals to offset the costs associated with the MRRT. The proposed MRRT does not seem fair and, on face value, appears to favour the bigger companies which have assets that sit outside the MRRT.”

Pearce added that conflicting market analysts’ reports as to the amounts of tax that the three major companies will pay in the early years was further contributing to significant uncertainty for Fortescue and other iron ore and coal miners.

“In these circumstances,” he concluded, “Fortescue seeks certainty on behalf of its 50,000 shareholders that the share of MRRT that it will pay in the early years will be fair and equitable compared with the bigger companies in the iron ore industry.”

The new tax, it was said, appears to favour established multi-national, multi-commodity miners in some elements of its design. In particular, the transitional capital arrangements of market value of mining rights favours the big miners by providing shelter from retrospectivity; and the uplift rate of the long-term bond rate plus 7% penalises emerging companies who will have much higher costs of funds than the three companies who signed the heads of agreement.

He requested that “the heads of agreement be amended or alternatively a further heads of agreement be entered into between the government and Fortescue, or with Fortescue and other emerging miners.”

Pearce said, therefore, that Fortescue will continue to work with iron ore miners outside of BHP Billiton and Rio Tinto to seek: interest deductibility; an increase in the uplift rate to reflect their actual costs of finance; an increase in the extraction allowance to 30%; and an increase in the MRRT profit threshold to AUD100m (USD87.5m) from AUD50m to encourage smaller mining companies.

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