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Australia is considering some tweaks in mining tax

June 17, 2010

“Australia’s government signaled it will consider changing the way its planned new mining tax is applied to some parts of the resource sector, but mining giants BHP Billiton, Rio Tinto and Xstrata PLC said little headway has been made toward a compromise despite fresh talks.

The planned resource-profits tax has met with furious opposition from the mining sector since it was unveiled May 2. The government has been eager to show progress in talks with industry, but comments from the miners themselves suggest Canberra isn’t near delivering what they would consider an acceptable compromise. The tax still must be approved by lawmakers ahead of its planned 2012 introduction. “

Source: Wall Street Journal, June 17 2010

Observations:

  • The Australian government is continuously meeting with top executives from Australia’s mining companies in order to draft a tax proposal that is supported by the miners.
  • Key issue for the mining companies is the impact on the cash flow of existing projects, which might not be able to pay back the investment (sunk costs) due to the increase in tax. The government is considering ‘transition arrangements’ to tackle this problem.

Implications:

  • The government wants to apply a one-size-fits-all tax to natural resources companies. Although many companies (among others petroleum, sand/gravel) complain about this approach, making exceptions would create a system that rivals the current Australian tax system in lack of comprehensiveness.
  • Low value commodity producers are protected in the tax proposal by the fax that the 40% levy is only applied above a rate of return of 6%. Most likely, the government will be persuaded to increase this threshold to a level more aligned with the industry, thus ensuring the companies they will be able to pay back future investments.

©2010 – thebusinessofmining.com

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