tag:theconversation.com,2011:/id/topics/resource-tax-33429/articlesresource tax – The Conversation2017-10-06T04:42:12Ztag:theconversation.com,2011:article/852502017-10-06T04:42:12Z2017-10-06T04:42:12ZExplainer: why is Western Australia fighting with miners over gold royalties?<p>Gold miners are <a href="http://www.abc.net.au/news/2017-10-05/gold-sector-wines-and-dines-media-fights-royalty-hikes/9017660">fighting back</a> against the Western Australian government’s <a href="http://static.ourstatebudget.wa.gov.au/17-18/2017-18-wa-state-budget-bp1.pdf">plan</a> to hike gold royalties by 50%, from 2.5% per ounce to 3.75%. </p>
<p>Western Australia is trying to improve its budget position. The miners claim that they cannot absorb the royalty increase. This fight shows the need to take a closer look at gold royalties and how much they raise, check out royalty rates on other commodities and consider how royalties could be done better. </p>
<p>There are some legitimate concerns about royalties. As they are paid almost immediately on production or “royalty” value, one concern is that payments are made before net profit is determined. Industry <a href="http://www.sbs.com.au/news/article/2017/10/04/gold-ceos-join-fight-wa-royalties">argues</a> that this is a strong deterrent to investment in marginal projects (mines that are barely profitable).</p>
<p>A well-designed tax should not affect business decisions (they should be “neutral”). The way WA levies royalties is also problematic in that no adjustment is made for profitability of a mine. Among other things, this means the government loses revenue in times of high commodity prices as royalty rates are fixed. </p>
<h2>How much exactly does WA receive in royalties?</h2>
<p>In 2015, the WA government released a <a href="http://www.dmp.wa.gov.au/Documents/Minerals/Mineral_Royalty_Rate_Analysis_Report.pdf">report</a> that analysed the state’s mineral royalty system. It stated that the system is designed to return to the community about 10% of the value of its minerals. Industry <a href="http://www.dmp.wa.gov.au/Documents/Minerals/Mineral_Royalty_Rate_Analysis_Report.pdf">agreed in principle</a> with the indicative 10%. </p>
<p>As you can see in the table below, gold is the second-highest royalty-earning commodity in the resource-dependent state. But this is estimated to fall from 2019-20, which is in line with the experience of Victoria, the other gold-producing state. </p>
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<p>Coincidentally, the current price of gold is quite high, despite a slowdown since 2013. Prices are determined by the global market, subject to consumer sentiment on world events. Although there is trend of declining prices, the WA government’s move on royalties is driven more by its immediate debt concerns than by the gold price. </p>
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<h2>What is a royalty and how does it differ from company tax?</h2>
<p><a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2918357">As early as</a> 1400 the British Crown used the term “royalty” to describe any right or privilege retained by the crown. Today a royalty is a type of rent due to government as the resource owner (based on the volume, value or profits of minerals at the mine) in return for the privilege of extraction. </p>
<p>Crucially, a royalty is paid in addition to company tax. The justification for levying a royalty is that mineral resources are finite – extraction can only occur once.</p>
<p>WA uses two systems to collect mineral royalties. The first is a specific rate – levied as a flat rate per tonne produced. The second is “ad valorem” – calculated as a proportion of the “royalty value”, which is a form of market value of the mineral. </p>
<p><a href="http://www.dmp.wa.gov.au/Documents/Minerals/Mineral_Royalty_Rate_Analysis_Report.pdf">Specific rate</a> royalties generally apply to low-value minerals and raw materials, such as salt, talc, clay and sand. These royalties are between 73 and 117 cents per tonne.</p>
<p>The <a href="http://www.dmp.wa.gov.au/Documents/Minerals/Mineral_Royalty_Rate_Analysis_Report.pdf">ad valorem system</a> has three general tiers of rates depending on the form in which the mineral is sold and used for higher-value commodities. Ore attracts a 7.5% royalty, concentrate (minerals that have been processed) 5% and metal 2.5%. The system takes into account price fluctuations and material grades in the royalty formula. </p>
<p>Gold is currently subject to the lower rate of 2.5%, and its industry has only been paying royalties since 1998.</p>
<p>The table below shows the mining royalty types and rates for the states and territories in Australia. Queensland and New South Wales have higher ad valorem rates for coal. Northern Territory has a royalty profit-based system, which attempts to address the lack of “tax neutrality” in royalties.</p>
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<h2>If not royalties, then what?</h2>
<p>So we can see a number of difficulties in the royalty system and lack of options for government. But if we want to see what a better system would have looked like we need only recall the mineral resource rent tax (MRRT) <a href="http://www.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/num_act/mrrta2012295/">introduced by the federal Labor government</a> in 2012. </p>
<p>One of the basic ideas of the MRRT was that payments on the value of minerals are paid after net profit is determined. Revenue collections would adjust according to profitability, which negates the main criticisms of royalties.</p>
<p>But industry and state governments fought against the MRRT from the outset. The MRRT was repealed in 2014. It could have been done better, using both systems in tandem. </p>
<p>The result is that state governments are left with an imperfect royalty system that needs regular adjustment to rates when more revenue is needed, which is unavoidable as the community requires an equitable return on its resources. Industry will always argue against any increase to taxes.</p><img src="https://counter.theconversation.com/content/85250/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Diane Kraal does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Western Australian government is trying to improve its budget position but businesses claim increasing royalties will deter investment.Diane Kraal, Senior Lecturer, Business Law and Taxation Dept, Monash Business School, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/774792017-05-10T09:01:16Z2017-05-10T09:01:16ZSenate inquiry told zero tax or royalties paid on Australia’s biggest new gas projects<p>This week’s budget papers show the government spending A$33 billion on education this year, nearly the same amount that Australia’s five new offshore gas fields will make in sales each year when they are running at full capacity.</p>
<p>Unless prices spike higher, however, these five monster projects may never pay a cent in royalties or Petroleum Resource Rent Tax (PRRT). Unless the aggressive tax structuring of the oil majors is met with equally aggressive enforcement by government, the world’s biggest oil companies - Chevron, Exxon, BP and Shell - will pay very little in income tax too. Billions each year in profit from extracting Australia’s natural resources will be funnelled offshore. It is a giveaway of immense magnitude.</p>
<p>Under pressure from a campaign by unions and the <a href="http://www.taxjustice.org.au/">Tax Justice Network</a>, the government finally extended the <a href="http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporatetax45th">Senate Inquiry into Corporate Tax Avoidance</a> to encompass the PRRT. Hearings have recently, though not ideally, been held in Perth. The evidence was stunning.</p>
<p>Five new offshore gas projects are coming online: Gorgon, Wheatstone, Ichthys, Pluto and Prelude. When these are running at full production capacity they are unlikely to pay any PRRT for many years to come – the companies themselves concede it will be 2029 – and no royalties apply. The Tax Justice Network and the International Transport Workers’ Federation (ITF) say there is a good chance, on the government’s own numbers, that PRRT will never be paid on these 40-year projects. </p>
<p>Only 13% of this new gas capacity is owned by an Australian-based company, Woodside, which counts Shell as its key shareholder with 13%.</p>
<h2>How could this happen?</h2>
<p>Hearing the testimony of the oil majors before the Senate committee, the casual observer might not have detected any significant issue of national interest. That is because the oil companies were permitted to tweak the numbers in the government expert’s report and overlay their own variables.</p>
<p>Chevron, the biggest player in the space and operator of Gorgon and Wheatstone LNG projects, dusted off an old report it had commissioned from ACIL Allen Consulting. This claimed its contribution to government coffers between 2009 and 2040 would be a thumping $338 billion.</p>
<p>Although he did not reject the ACIL report as being old, managing director Nigel Hearn predicted the PRRT payments from Gorgon (now shipping) and Wheatstone (to ship later this year) would be between $60 billion and $140 billion.</p>
<p>Unless the price of oil and gas runs sharply higher, however, the more plausible figure is zero as PRRT won’t be paid for years, and perhaps not at all. Zero to $338 billion. You could steer a fleet of oil tankers through that gap. So how believable are the claims of the gas lobby?</p>
<p>In its submission, the Australian Tax Office estimated the sector had amassed $238 billion in PRRT credits, credits the companies could use for years before they started to pay significant amounts in PRRT. Further, under the PRRT as it is presently structured, exploration losses are transferable, so they can be offset against income on other projects.</p>
<p>Besides the flexible structure of PRRT concessions, the industry has $34 billion in carried-forward tax losses to offset against income tax, as noted in the submission by the Tax Office. </p>
<p>These are mostly held between the major players – Chevron, Shell, Inpex, ExxonMobil and Total – which can deploy the credits in further reducing any income tax they may owe.</p>
<p>In defence of these companies, they were not expecting the price of oil to halve and the present spectre of a global gas glut. The economics of the projects were based on higher commodity prices. As was the PRRT.</p>
<p>According to Wood Mackenzie analysis conducted for the government, the gas giants would pay $US7 billion in PRRT payments over the life of the five emerging gas projects. That’s at an oil price of $US60.</p>
<p>At a price of $US80, PRRT of $US25 billion would be paid over the 40 years. Yet the oil price is now beneath $US50.</p>
<p>Chevron’s claim to the Senate committee of PRRT payments of $60 billion to $140 billion is wildly out of sync with Wood Mackenzie’s estimate of $7 billion. This is because the companies were able to take the Wood Mackenzie analysis and tweak it as they saw fit, and they surely seized the opportunity.</p>
<p>When asked by the committee about the assumptions underlying the group’s $60 billion to $140 billion PRRT projections – things like the oil price – Chevron executives took the question on notice.</p>
<h2>Adding insult to tax injury</h2>
<p>Incidentally, Chevron has now taken the mantle from BP Australia on lobbying to drill in the Great Australian Bight and its top tax executive confirmed that the exploration company was entitled to tax credits in the event of an oil spill.</p>
<p>Under the PRRT, said tax executive Michael Fenner, if there was a spill from a well, the company was entitled to deduct the full amount for recovery plus the 18% uplift which compounded annually. </p>
<p>In this event, taxpayers would effectively be paying for the oil spill as the uplift provisions are so generous that exploration tax credits almost double in four years.</p>
<p>The other issue with the PRRT regime is that exploration credits are 100% transferable. The ATO has identified this as a problem because the oil companies had already banked $238 billion in PRRT tax credits.</p>
<p>Tranferability is presumably why ExxonMobil Australia pays half of what BHP pays in PRRT on gas production in the Bass Strait.</p>
<p>Jason Ward, global strategist with the International Transport Workers’ Federation (which has been running a campaign to expose Chevron’s tax dodging) and who testified before the Senate, said his estimates of zero PRRT were based on industry numbers. He told the committee:</p>
<blockquote>
<p>APPEA’s (oil and gas peak body the Australian Petroleum Production & Exploration Association) modelling, also done by Wood Mackenzie, shows that at an oil price of $US80 a barrel Gorgon would pay something. At $US60, there is no PRRT. Why are we giving away our resources for free to the world’s largest multinationals while the government raises taxes on working people?</p>
</blockquote>
<p>At least with the LNG producers at Gladstone, the Queensland government gets a 10% royalty. Even then, says Ward, Japan collects more tax on imported Australian LNG than Australia collects in PRRT on all LNG production, and the prices of Australian gas are often cheaper in Japan.</p>
<p>There are no royalties on the new offshore gas projects. At the heart of the problem is that tax or royalties based on profit rather than volume are easily gamed. Profit can be manipulated, whereas sales and production cannot. </p>
<p>The Senate inquiry is absolutely vital to Australia’s revenue base. Unless the PRRT is reformed, billions in royalties and taxes may never be forthcoming.</p>
<hr>
<p><em>This column, co-published by The Conversation with <a href="http://www.michaelwest.com.au/">michaelwest.com.au</a>, is part of the <a href="https://theconversation.com/au/topics/democracy-futures">Democracy Futures</a> series, a <a href="http://sydneydemocracynetwork.org/democracy-futures/">joint global initiative</a> with the <a href="http://sydneydemocracynetwork.org/">Sydney Democracy Network</a>. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.</em></p><img src="https://counter.theconversation.com/content/77479/count.gif" alt="The Conversation" width="1" height="1" />
<h4 class="border">Disclosure</h4><p class="fine-print"><em><span>Michael West has received funding from GetUp and the Tax Justice Network to analyse the tax affairs of 20 top multinational companies operating in Australia.</span></em></p>The Senate Inquiry into Corporate Tax Avoidance has heard stunning evidence about the failure of the tax and royalties system to capture any of the billions being generated by new projects.Michael West, Adjunct Associate Professor, School of Social and Political Sciences, University of SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/688132016-11-21T04:06:27Z2016-11-21T04:06:27ZAustralia must catch up with Papua New Guinea on how we tax gas<p><a href="http://www.treasury.gov.pg/html/national_budget/2017.html">Papua New Guinea’s 2017 budget</a> takes big steps in resource tax reform. Following suggestions <a href="https://pngnri.org/portfolio/proceedings-of-the-2014-png-tax-review-and-research-symposium/">that I made together with former Labor minister Craig Emerson</a>, starting next year resources companies operating in Papua New Guinea will pay a revamped resource rent tax, as well as the existing royalties and company taxes.</p>
<p>With Australia’s <a href="https://www.theguardian.com/business/2016/nov/21/australia-budget-deficit-beyond-2021-scott-morrison">budget deficit worsening</a>, following Papua New Guinea’s lead may help us bring in more revenue from natural gas, sooner. </p>
<h2>The different ways of taxing resources</h2>
<p>Companies in Australia operating large gas-to-liquefied natural gas (LNG) projects pay a resource rent tax (a tax levied on above-normal profits), as well as the regular company tax. Above-normal profits from these new projects are perhaps a decade away, which is why there has been a recent drop in <a href="https://theconversation.com/australia-is-missing-out-on-tax-revenue-from-gas-projects-62899">resource tax revenue</a>. </p>
<p>This resource rent tax has replaced royalties for most of these LNG projects. While the resource rent tax is paid on profits, royalties are paid directly on the value of a resource as it is extracted, long before profit or loss is a factor. </p>
<p>A re-introduction of some level of royalties would not increase the tax burden for industry, but would more immediately provide much-needed revenue for government. </p>
<h2>Our tax system wasn’t designed for current gas production</h2>
<p>Australia’s <a href="http://www.austlii.edu.au/au/legis/cth/consol_act/prrtaa1987452/">petroleum resource rent tax</a> (PRRT) applies to oil and gas projects but it was not originally fine-tuned for gas.</p>
<p>My <a href="https://taxpolicy.crawford.anu.edu.au/publication/ttpi-working-papers/8697/petroleum-resource-rent-tax-overview-primary-documents-and">recently published PRRT working paper</a> provides an overview of newly available archival documents that give insight into the political and consultative processes of the Hawke-Keating government (1983-1991), which passed the PRRT. </p>
<p>Back in 1984, gas production was for domestic consumption and the technology for LNG exports was underdeveloped. The archival papers show that gas design considerations were excluded because projected PRRT revenues could not match gas royalties. So instead the Hawke-Keating government focused on generating PRRT revenues from oil. </p>
<h2>The gas industry is important</h2>
<p>There are now more gas than oil reserves in Australia. The image below shows the large integrated gas-to-LNG projects in Australia: offshore natural gas in the west, and onshore coal seam gas in the east. The focus of resource tax reform should be on gas projects in Commonwealth waters off Western Australia. They include Woodside’s Pluto, Chevron’s Wheatstone and Gorgon, and Inpex’s Ichthys. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=438&fit=crop&dpr=1 600w, https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=438&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=438&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=551&fit=crop&dpr=1 754w, https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=551&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/145954/original/image-20161115-14006-1a19f8p.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=551&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Large LNG Projects, Australia.</span>
<span class="attribution"><span class="source">Santos Ltd, with permission</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>The table below shows the current taxation of selected LNG projects. Company tax and the PRRT apply to all these projects. But only coal seam gas and the North West Shelf projects need pay royalties. </p>
<p>Industry has not complained about the payment of these royalties. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=565&fit=crop&dpr=1 754w, https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=565&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/145956/original/image-20161115-30744-3xdtkd.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=565&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Author provided</span>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<h2>The way we tax our gas needs reform</h2>
<p>All countries with petroleum resources levy additional resource taxes, which result in industry paying high taxes. For example, look at Norway and the United Kingdom. In both those countries, the accepted justification for additional resource taxes on petroleum is due to the finiteness of mineral resources: extraction can only occur once.</p>
<p>As the Turnbull government scrambles to fix the budget deficit, the media has focused on the low revenue forecasts from <a href="http://www.abc.net.au/news/2016-10-10/oil-and-gas-tax-may-raise-no-extra-revenue-for-decades/7917682">the PRRT on gas for LNG export</a>. No wonder, given Australia’s export gas <a href="http://industry.gov.au/Office-of-the-Chief-Economist/Publications/Documents/remp/REMP-April-2015.pdf">industry has invested $200 billion</a> in new infrastructure. </p>
<p>Pressure is building for a parliamentary inquiry into the PRRT. At a recent Senate Economics Legislation Committee hearing, Finance Minister Mathias Cormann and Tax Commissioner Chris Jordan found it difficult to answer questions <a href="https://youtu.be/1TBMoWWXoGU">posed to them on the PRRT</a>. </p>
<h2>How should the natural gas for LNG be taxed?</h2>
<p>The PRRT has its place in the tax mix. However, given the different infrastructure needs and lower pricing characteristics of natural gas, the PRRT for gas needs to be modified. This has been highlighted before, most notably the 2009 Henry Review of Australia’s tax system, <a href="https://taxreview.treasury.gov.au/Content/Content.aspx?doc=html/home.htm">criticised the design of the PRRT for gas</a>. </p>
<p>The Turnbull government should assess whether the sole PRRT in relation to LNG projects in Commonwealth waters is sufficient to meet the objective of sharing the benefits from resource projects. Australia’s 2016 federal budget figures show a projected decrease in PRRT revenues to $800 million per annum in 2020, which suggests that the community could <a href="http://www.budget.gov.au/2016-17/content/bp1/html/bp1_bs4-02.htm">wait decades for benefits from PRRT on gas</a>. </p>
<p>A more equitable arrangement would require more prompt payment to the government for gas extraction, such as production-based royalties paid on the coal seam gas and North West Shelf projects, as well as a modified PRRT design. </p>
<p>Paul Keating famously described the 1990s recession as <a href="http://www.theage.com.au/news/business/the-real-reasons-why-it-was-the-1990s-recession-we-had-to-have/2006/12/01/1164777791623.html">“the recession we had to have”</a>. Likewise, taxation reform of the PRRT applicable to natural gas processed for LNG export is an absolute necessity. It’s a reform we “have to have”.</p><img src="https://counter.theconversation.com/content/68813/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Diane Kraal does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The way Australia taxes companies for gas projects now lags behind our closest neighbour, Papua New Guinea, which has reformed its tax system to ensure it gets money sooner.Diane Kraal, Senior Lecturer, Business Law and Taxation Dept, Monash Business School, Monash University, Monash UniversityLicensed as Creative Commons – attribution, no derivatives.