The Minerals Resource Rent Tax - One step closer?
The Minerals Resource Rent Tax is one step closer to becoming a reality with the introduction of the Minerals Resource Rent Tax Bill 2011 into Parliament on 2 November 2011.
But the Bill will face a torrid passage through Parliament. The Government needs the support of the independent members and they are lining up with their demands including: closer scrutiny of the coal seam gas industry; a commitment to abolish state-based royalties; more generous concessions for small miners; and a mining development fund. And that’s just to get the Bill through the House of Representatives.
The commitment to abolish state-based royalties is an interesting one. This was the recommendation of the Henry Review but the Government opted instead to credit royalties towards the MRRT to avoid the argument with the states. State royalties are also a reason why the Petroleum Resource Rent Tax, which has been around since 1987, has until now only applied to offshore oil and gas projects in Commonwealth waters. Given that Western Australia, New South Wales and South Australia have recently increased their royalties, any such commitment will be tough to deliver on.
Once the Bill gets to the Senate, the Greens will want to make the MRRT more like the original Resource Super Profits Tax proposal and extend it beyond coal and iron ore to gold at least. However, faced with the alternative of no MRRT, the Greens are likely to vote in favour of the Bill.
Assuming the Bill runs the House and Senate gauntlets and is passed into law, it may then face a High Court challenge. Such a challenge would primarily be on the grounds that the resources are property of the states making the MRRT an unconstitutional tax on state property. In response, the Government will argue it is a tax on profits made by the private sector.
Finally, the fate of the MRRT may be decided by the outcome of the next Federal Election. If there is a change of Government, it may face repeal.
Putting the continuing uncertainty surrounding the MRRT to one side, the 320 or so corporate groups that will pay MRRT have just seven months to prepare for its introduction. And preparation will be no easy task. To compare it to the introduction of the GST in 2000 would not be unreasonable.
MRRT taxpayers need to be thinking now about a range of issues including:
- any impact on project structures going forward;
- factoring the MRRT into any corporate level transactions and due diligence;
- whether any “pass through” or “change of law” clauses in supply contracts enable prices to be increased or renegotiated to take account of the MRRT;
- any impact on debt finance (eg if the MRRT will cause a breach of any covenant, representation, warranty or financial ratio);
- any impact on the capacity to pay dividends; and
- whether any stock market disclosure is necessary.
Once the MRRT is up and running it will, like any new tax, be the subject of disputes and litigation. Using the GST as an example, audit activity takes around four years to ramp up. The assessment and objection phase takes another few years meaning that MRRT cases will start to come before the courts in earnest in the back half of this decade.
Areas ripe for dispute are the determination of the “starting base” and the calculation of “mining revenue”. Determination of the starting base involves ascribing a market value to existing assets. An allowance for depreciation of the starting base is then taken into account in calculating the MRRT. Market valuations are however contestable.
The calculation of mining revenue will necessitate an economic or transfer pricing analysis for all but the most simple of operations. This is because the MRRT is intended to tax the value of the resource at the point of extraction. It is not intended to tax value added by the taxpayer down the line. However, most taxpayers integrate upstream and downstream operations to a greater or lesser extent. It is therefore necessary to take the revenue or profit of the taxpayer and apportion it between the resource itself and value added down the line using a transfer pricing methodology (eg comparable uncontrolled price, net-back or residual profit split). Again, there is room for dispute here.
To reduce the likelihood of dispute, taxpayers should consider agreeing the pricing with the Australian Taxation Office upfront in a private ruling or advance pricing agreement.