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Australia unveils resources tax

May 3, 2010

“Australia’s government plans to reap billions of dollars more in tax from the country’s booming resources industry and use the extra revenue to cut company taxes to a more globally competitive level while offering more generous tax concessions for smaller firms.”

Source: Wall Street Journal, May 2 2010

Observations:

  • A federal royalty charge of 40% on resources profits will increase Australia’s GDP by 0.7%.
  • Rio Tinto share price decreased by over 4% on Friday as the royalty could decrease corporate profit by 27% (FT May 1 2010).

Implications:

  • As mining companies are not flexible in their choice of the mining location, companies with a strong production base in Australia will suffer from the tax changes.
  • The new iron ore pricing system will to a large extent prevent prices to be increased to make up for the decrease in profit.
  • Other countries might follow Australia’s example, trying to reduce deficits by taking a larger part of the mining profits.
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