Home > Market change > Resource industry angry at tax increases

Resource industry angry at tax increases

May 4, 2011

“High commodity prices are triggering a fresh wave of resource nationalism around the world as governments impose higher taxes on oil and mining companies to extract a bigger share of the profits generated from mines and wells. ‘There has been a tendency to raise taxes and royalties when oil prices are high to grab a larger share of the economic rent from oil resources,’ said Amy Myers Jaffe, energy expert at Rice University. Today, with many governments struggling with budget deficits, the temptation to extract ‘an economic ransom’ from oil and mining companies is even higher.

Meanwhile in Australia, the government has tried and failed to implement a 40 per cent ‘resources super profits tax’ on metals, minerals, oil and gas. Julia Gillard, Mr Rudd’s successor, watered down the tax, days after taking office in June in face of strong opposition from miners. The tax rate will be lowered to 30 per cent and apply only to coal and iron ore. But Ms Gillard’s government still faces a battle to pass the tax into law. The main opposition parties argue the tax is too harsh while the Green party opposes it because it does not hit miners hard enough.”

Source: Financial Times, May 2 2011

Observations:

  • Many countries are looking to copy the Australian model of increasing taxes on profits above a threshold level for specific industries.
  • Many developing countries (e.g. Guinea; Mongolia) try to create a situation that gives them income from resource projects in the long term by demanding an equity stake in projects and trying to stimulate investments from foreign multinationals.

Implications:

  • The increase in tax rates and other creative ways governments use to gain part of the income of resource companies are driven by a combination of increasing resource supply insecurity and the troublesome financial position of many governments. Resource-rich countries need to find a balance between benefiting from the mined resources and maintaining an attractive investment climate for mining firms; something the initial plan for tax reform in Australia by mr. Rudd failed to do.

©2011 | Wilfred Visser | thebusinessofmining.com

Advertisements