‘Policy-makers around the world can learn a lesson when considering a new tax to plug a revenue gap, or play to local politics.’
—Rio Tinto CEO Tom Albanese, July 2010, one week after Labor dumped Prime Minister Rudd and the super-profits tax72
In mid-2010, when the world’s biggest mining companies were experiencing their best trading conditions ever, they suddenly ran into trouble. While voracious demand from China and the rest of Asia had driven prices and volumes to record levels, the big miners were alarmed by a plan unveiled by Australia’s Labor government to impose a 40 per cent ‘super-profits’ tax on their earnings. Not only would they pay more tax in Australia; they also feared other countries would follow suit. Before they knew it, an outbreak of resource nationalism could hit their global operations.
Mining companies usually benefit from the belief that what’s good for the company is good for the country, especially in the developing world, where they exercise a lot of influence over governments. But in this case they were not dealing with your typical tin-pot resource-rich country. They were dealing with Australia, a $1.3 trillion economy and one of the world’s biggest mineral exporters, a country that had become the only Western nation to sail through the global financial crisis and record its nineteenth year of continuous economic growth. The amount of money at stake in Australia alone was mind-boggling. The miners had put in place expansion plans to at least double coal and iron-ore production in coming years. In 2010 these two commodities were already Australia’s most lucrative exports, earning around $90 billion a year—three times the amount earned a decade earlier. Combined with soaring prices, this expansion would deliver astronomical returns on the miners’ operations.
As the mining boom gathered unprecedented momentum, the then Treasury secretary, Ken Henry, realised it was time to apply a more rational and effective tax regime to resource production. As a boy growing up amid the tall timbers of Taree in northern New South Wales, Henry had seen how logging companies were able to harvest century-old trees in exchange for a royalty of a few dollars.73 He realised that resource companies in Australia were doing pretty much the same with assets that, unlike trees, cannot be replanted. Economists in the federal Treasury had estimated that during the resource boom in the 2000s, state and federal governments had kissed goodbye about $35 billion in revenue because they failed to tax the super-normal profits that arise from time to time. This is why they came up with the so-called Aretha Franklin tax—the resource super-profits tax, or ReSPecT. Treasury put together a proposal that was far more complex than it needed to be, given they had a workable model in the petroleum resource rent tax (PRRT), which was introduced back in the 1980s. Their new proposal involved the government taking a 40 per cent stake in resource projects, sharing in both the losses and the profits, which opened up a Pandora’s Box. It was a good idea that was poorly designed and communicated.
In his first interview on these events, Kevin Rudd reveals that the proposed tax followed ‘long-standing research into the problem of Dutch disease’ by Treasury, and that Henry put forward the proposal in this context. ‘I knew what he was talking about, the dual effect of putting capital into a globally competitive sector, leading to the massive appreciation of the currency, leading to a double impact on the rest of the economy as it adjusts to the exchange rate while starving it of investment capital,’ Rudd says.74
The new tax would have raised $12 billion in the first two years, rising to more than $100 billion over a decade. But it wasn’t designed only to generate money; it also aimed to stop our economy from, so to speak, losing its head, by ensuring a more balanced development of our non-renewable resources. As soon as Rudd sprang the new tax on the industry, the big three companies decided they had to kill this plan—and they were prepared to play dirty. When London-based Rio Tinto, Melbourne-based and London-listed BHP Billiton and Swiss-based Xstrata put their collective weight together, they are a formidable combination. Their total combined value on global sharemarkets is $450 billion, 86 per cent of which is in foreign hands. The three companies are worth more than the size of Australia’s federal budget, and about one-third the size of the entire Australian economy. Together they embarked on a savage lobbying effort to bring down the proposed tax by attacking the government and its prime minister. They began this extraordinary campaign before the proposal had even been put into legislation, and before parliament had had the opportunity to review it.
BHP led the offensive, establishing a ‘war room’ inside its Melbourne head office. Run by senior financial executive Gerard Bond, along with senior staffers and external consultants, this team worked on the project for about seven weeks. BHP commissioned its own focus-group research, which was used to drive a $22 million TV and print-media blitz and a targeted lobbying campaign that included Geoff Walsh, a former national secretary of the ALP and former staffer to prime ministers Bob Hawke and Paul Keating. BHP spared no expense on the campaign, which reported directly to CEO Marius Kloppers. External talent included the market-research specialist Tony Mitchelmore and the corporate strategist John Connolly. Mitchelmore had been plucked from obscurity by Labor to work on the Kevin07 campaign and had stayed on doing qualitative research for the ALP before working for BHP on this campaign. He organised an intensive round of sixteen focus-group sessions, which revealed that many participants believed Rudd’s proposal had come from left field and was likely to derail the one industry that was keeping Australia’s head above water. Realising that they had a good chance of killing the tax, the miners adopted a ‘whatever it takes’ approach. Mitchelmore conducted further focus-group research for the next six weeks, and the findings informed the TV advertising campaign crafted by another Kevin07 veteran, Neil Lawrence.
The miners’ efforts were spectacularly successful. Seven weeks and four days after unveiling the preliminary plan, Prime Minister Kevin Rudd was deposed and so was his tax. Despite having guided his country through the worst global downturn since the Great Depression, he became only the second first-term Labor prime minister to be removed from office, the first being James Scullin in 1930. Big Dirt, as the three companies are now known, executed regime change two months before the voters of Australia exercised their democratic rights at the ballot box. Having subverted a functioning democracy, mining executives were celebrating in airport lounges around the country.
Rudd’s plan for a 40 per cent marginal tax on super profits was not some kind of left-wing tax grab. Some of the world’s more conservative economic institutions, such as the IMF and the World Bank, say it is good policy. While the version proposed by Rudd suffered from poor consultation and complex design, it was still at the drawing-board stage. The government wanted to overhaul a mishmash of unwieldy state royalties that harked back to the nineteenth century. In its place, they would introduce a modern and more rational system, to be run by the federal government. Miners would be compensated for the payment of state royalties, but the overall tax burden would be higher, around 57 per cent. The new tax would also have delivered a substantial windfall to the current generation and, if the government managed the money well, to generations to come.
Immediately after becoming prime minister on 24 June, Julia Gillard turned her attention to thrashing out a deal with the three multinational miners. Eight days later, she announced a breakthrough that cut the marginal tax rate from 40 to 22.5 per cent, restricted its scope to coal and iron ore, and added some creative accounting concessions for the big miners. Total cost of the concession: $15 billion over four years, rising to $60 billion over ten years (and possibly $100 billion if prices stay high). Gillard changed the name of her policy to the more polite-sounding Mineral Resource Rent Tax (MRRT). A raft of emails released under FOI shows that BHP was very much running the show. Its executives drafted the heads of agreement before emailing it to Wayne Swan’s office for approval.
Repeating her ‘moving forward’ mantra, Gillard announced the compromise like this: ‘It moves things forward whether you’re a coal miner in the Bowen Basin, a contractor in Karratha, an opal miner in Coober Pedy or a young worker in Sydney.’ In fact, the MRRT deal made life worse for smaller Australian-based miners by removing the resource exploration rebate and by awarding big miners a significantly lower tax rate. For iron-ore miners with mature projects, which means the big companies, their projects would be taxed at 36.4 per cent—close to or even below current levels—whereas small or medium-sized projects would pay an average rate of 48.9 per cent, according to modelling produced by Treasury and released under FOI. The big miners benefited from a concession that allows them to calculate deductions for tax purposes using the market value rather than the purchase price (or ‘book value’) of their assets, providing huge depreciation allowances. The small and medium Australian players were not represented in the negotiating room, and the new deal actually reversed the central and laudable aim of the RSPT—that is, reducing the tax burden on start-up operations, which are penalised by the state royalties because the impost is paid when production starts, rather than after the company actually begins to make a profit. The success of multinational miners in securing these concessions, and in beating voters to the punch, reveals the perverse world order in which we live: an advanced country can possess enormous riches but lack the capacity to do what is clearly in its own long-term interest. Resource-rich countries often turn out to be very poor at managing their abundant wealth, and this doesn’t apply only to the developing world. As this case demonstrated, muscular multinationals can be very effective when bearing down on weak Westminster governments.
Not only did the miners change the prime minister and change government policy, they went on to brag about how their coup had stopped similar schemes from spreading around the world. When Australia moved to introduce the RSPT, African and Latin American countries were paying close attention. Kevin Rudd says the vicious campaign by the industry established a precedent. The defeat had serious implications in Africa, where mining companies trade countries against each other, and in Latin America. Rudd recalls:
The stakes were phenomenally high. Which is why they wanted any significant tax adjustment stopped dead in its tracks here, despite their record profitability. They feared the precedent it would establish in the developing world, where decent revenue flows are needed desperately to fund the building of the most basic infrastructure to underpin their long-term economic development.75
Exactly one week after Gillard announced the compromise, Rio Tinto’s American chief executive, Tom Albanese, told a group of mining executives in London that the Australian experience should send a salutary message to governments around the world. Governments should ‘learn a lesson’ from the episode, he declared. A few months later, Xstrata’s chief executive, Peter Freyberg, was still bragging. Xstatra is partly owned by the shadowy Glencore International, a commodities trading house that was founded by Marc Rich, who fled to Switzerland after being charged by the US government with tax evasion. Glencore’s modus operandi is to profit from control of the supply of key commodities, and it has been accused of creating speculative bubbles. Interviewed on national radio, Freyberg stressed that his company could move investment offshore if local policy didn’t suit. Asked if he was threatening Australia, he said, ‘No, it is not a threat. It is a statement of fact … We have investment opportunities globally for be it copper or coal or other commodities, and we look at investing in the most competitive regions we can to maximise returns for our shareholders. If policy makes Australia less competitive then we will see that investment move elsewhere.’76 This raises one of the real furphies in the mining companies’ propaganda. Mines are not like factories that can be packed up and moved offshore. The resources are here in the ground, and Australia provides a stable, peaceful and democratic environment. Places like Brazil and Africa provide potentially more supply, but companies have to factor in higher ‘country risk’ in many of these places. Australia is the sweet spot for mining multinationals: we have a lot of the stuff and we let it go for a song.
BHP’s executives managed to avoid bragging, although this company did more than any other to bring down the tax and Kevin Rudd. The total cost of the campaign was $22 million. The Minerals Council of Australia, which is largely funded by the big three companies, spent $17.2 million, while BHP spent $4.2 million on its own and Rio $537,000. Cabinet ministers in the Gillard government say that Geoff Walsh delivered the Mitchelmore research directly to the then ALP national secretary, Karl Bitar. These claims are strenuously denied by Walsh.77 But the BHP research is understood to have panicked the Labor heavyweights, prompting them to move against Rudd even though he still had a commanding 4 percentage point lead in the national Newspoll.78
The campaign by the mining companies was aided by the federal Opposition and the nation’s peak business group, the Business Council of Australia, even though the non-mining sector would have gained a 2 percentage point cut in the corporate tax rate from the proceeds of the new tax. The Business Council is meant to represent the full spectrum of business in Australia, yet its position was determined by an industry representing just one-tenth of the economy. The bankers who dominate the BCA, most notably president Graham Bradley, no doubt thought they’d see fewer financing deals as a result of RSPT. The Opposition, meanwhile, was wholeheartedly with the miners. During the fracas, Tony Abbott gave the industry his undying support, declaring he would fight the tax as long ‘as there is breath in my political body’. Abbott’s party has plenty of form when it comes to taking care of miners. In 1991 it opposed an entirely reasonable and long overdue policy to end the tax exemption on gold mining, while accepting donations from gold miners. The support of the Coalition and business for the mining industry shows what can happen to good policy when powerful interests successfully divide and conquer the political system.
This episode highlights the growing power and influence of mining and energy companies. Increasingly, these companies control our economy and environment in ways we have scarcely begun to comprehend. Mining’s rapid growth has given it a much bigger say in national affairs and key figures like iron-ore billionaire Gina Rinehart want even greater influence, which is why she has taken a stake in the Ten Network and Fairfax Media. No longer do miners want to be seen as just diggers of dirt. They want to be recognised as corporate titans in charge of highly sophisticated operations. Western Australian premier Colin Barnett has expressed this view, demanding more respect for the industry: ‘I was somewhat offended when Western Australia was described as China’s quarry, and that sells this state short. The industry here is world leading, very sophisticated, high technology and the mining and petroleum industry is Australia’s leading industry. This is the future income for all Australians,’ Barnett said on national television.79
The super-tax episode is not an isolated case. Australia has a long history of failing to exercise strong governance over mineral and energy resources. For over 150 years this country has celebrated those who are able to hold government to ransom and refuse to pay for the right to exploit our wealth, starting with the miners at the Eureka Stockade, who revolted over a plan to impose higher taxes. In the latest episode, billionaire miners stood shoulder to shoulder with workers in hard hats, as though they had a common interest.
One of the legacies of Australia’s 1901 Constitution is that state and territory governments control the development of mineral concessions. These governments have proved particularly inept at taxing the industry. They say you should never stand between a state premier and a bucket of money, but when it comes to mining, it’s a special case. Taxes and royalties haven’t kept up with the huge profits now being earned. For example, when revenue earned by mining companies increased three-fold over the course of the last decade, the royalties paid to state governments increased only 2.3 times.
It is no exaggeration to say that every state government in Australia has been letting down its citizens, especially since the 1970s, when a better way to tax mining emerged. From 1973, Australian economists Ross Garnaut and Anthony Clunies-Ross set out in economic literature how a resource rent tax (RRT) would capture a fair share of profits without undermining investment in the industry. In using the term ‘rent’, they were targeting the very high profits that accrue when companies are given control of a valuable commodity of which there is finite supply. The two had been working in Papua New Guinea, where the Bougainville mine had been given extended tax exemptions by the colonial administration. As Garnaut explained, this mine, which began production in 1972, soon benefited from very high copper and gold prices. The site was so profitable that half of Rio’s profits came from this single mine, although the company only owned half of it. ‘They’d been given a tax-free holiday, been able to hold depreciation, and then gold was going to be tax-free. It was an extraordinary agreement,’ he says.80
The two men set their minds to devising a way of collecting a fair share of Bougainville’s profits without discouraging investment in other mines. They came up with the RRT, a tax that only kicked in when returns exceeded the threshold needed to justify the investment in the first place (they put this at 10 percentage points above the long-term risk-free bond rate). The art of taxation has been described as plucking the goose in such a way as to maximise the quantity of feathers obtained and minimise the hissing. Garnaut and Clunies-Ross had devised a no-hiss tax, or so they thought. The federal Labor Party adopted the principle of the RRT as part of its platform, although the state branches were evidently not paying attention. Not long after winning office in 1983, the Hawke government set about introducing the RRT for the offshore petroleum industry, which was the only area where the federal government had jurisdiction over mineral resources. The proposal did in fact create a lot of hissing, with the big oil companies declaring that the tax would kill the golden goose. The shadow Treasurer, John Howard, warned that ‘the Hawke government’s RRT will effectively destroy the incentive for offshore exploration’.81 And Alexander Downer, the newly minted member for Mayo, gave Labor an absolute roasting in parliament:
I think it is an extremely regrettable proposal; I think it is an ill-considered proposal; and, what is worse, I think it is an ideological proposal which is going to do very real damage to oil exploration in Australia … It is an anti-production, anti-development, anti-profit and anti-export tax, and the government deserves to be condemned for the irrationality of that decision.82
There was nothing irrational about this tax at all; it was rational economics at its very best. Bob Hawke, together with his treasurer, Paul Keating, and his resources and later finance minister, Peter Walsh, persisted—Labor politicians had more backbone in those days, as well as some good advisers who persuaded them to stay the course. Eventually, the oil companies realised that the new impost, which became known as the Petroleum Resource Rent Tax (PRRT) and was an adapted version of the Garnaut model, was well designed. It was so well designed that in 1990 BHP and Exxon asked the government to replace production royalties on their Bass Strait operations with PRRT, thereby enabling them to extend the life of those fields by twenty years or more. Trade Minister Craig Emerson, who wrote his PhD thesis on RRT, said the regime has ‘stood the test of time, having scarcely been modified in its twenty-five years of operation’.83 It did not stop some very substantial investments in offshore gas production, including $60 billion in the recent Gorgon and Pluto LNG projects and $70 billion in coal-seam gas production. The major oil companies have proceeded with these projects without any fuss about excessive taxation.
The RRT is an Australian invention that is now regarded as best practice by institutions such as the IMF, the OECD and the World Bank. But even though our own economists invented it, the federal government was reluctant to extend it to onshore mineral production, as this is the states’ domain. The work of Garnaut and Clunies-Ross did lead the newly formed Northern Territory government in 1982 to introduce a profits-based mineral royalty, which simply takes one in every five dollars of profit earned by its miners, but none of the states has since followed this eminently sensible model. Instead they’ve stuck with their anachronistic regimes, letting the established miners off the hook while discouraging small to medium-sized compaies. Royalties are a badly designed impost because they force both mature and emerging miners to hand over their pound of flesh before the operation has turned a profit. Typically, these royalties range from 6 to 10 per cent, depending on the type of mine. Developing countries tend to favour royalties because they like to get the money upfront, rather than waiting a few years to hit the big time. This is of course understandable for these countries, as they are often in dire need of money. They would prefer to have $1 million of revenue today, rather than wait a few years for $2 million. But it doesn’t make sense for Australian states, which preside over mature economies with broad tax bases; they can afford to wait to cash in on mining profits. For thirty years our state treasurers have known—or should have known—of a more effective and efficient way of taxing the mineral sector, but as a result of sheer laziness or incompetence—or both—they have not acted. Yet again, Australia is operating like a developing country.
Trying to establish just how much money the industry makes is no longer as straightforward as it once was. By and large, most people seem to think that it’s a good thing if miners make a lot of money, whereas the same rule doesn’t apply to banks, who cop a hiding every time they announce big profits. Perhaps this is because resource companies do a very good job of keeping the locals happy.
Mining spreads money around in myriad ways. As mining companies have relatively few workers compared to other industries, they can afford to pay their employees handsomely. In theory this circulates money through nearby towns, bolstering the local economy. In hard-pressed rural Queensland, which is emerging from a decade-long drought, the development of mines in the interior probably stopped some regional centres from imploding as farm incomes collapsed. The industry was the saving grace of several regional towns in that state. But increasingly, many miners are ‘fly in, fly out’ workers, commuting from major cities and towns. Some workers live in small rural towns in the eastern states and fly across the country to work fourteen-day shifts in the Pilbara. This means the money earned by a miner working in Karratha may be spent on the other side of the country.
Rather than build towns or rely on local labour (which is sometimes limited), many companies now fly, bus or drive their workforces in and out of operations, especially in remote regions. Rio Tinto and BHP built mining towns in the Pilbara in the ’60s and ’70s, but this ended in the 1980s. Now, about 5,000 of Rio Tinto’s Pilbara workers fly there from outside the region. This means that local communities can experience the ill-effects of mining while getting very few direct benefits. In towns like Narrabri in northern New South Wales and the Queensland coal towns of Blackwater, Dysart and Moranbah, enormous work camps have been built on the outskirts of towns to accommodate the revolving labour force. Tony Maher, national president of the mineworkers union, CFMEU, says the FIFO model means mining companies are now contributing very little to the development of regional Australia.84
Cedric Marshall, mayor of the Isaacs regional council that covers key Queensland coal towns, says that in places like Coppabella the 1,700-bed mine camp is many times the size of the town, and in some bigger towns the camps are as big as the towns themselves. Marshall says the transient workforce means the towns miss out on economic benefits, while the extra traffic makes regional highways more dangerous. He says there are hundreds of trucks on the road each day, many of them with wide loads. The region used to transport its grain, general freight and fuel by rail, but this is all done by road now because of the demands of the coal industry on the rail network. A coal train now leaves the centre of Coppabella every twenty minutes.85 A detailed study by Professor John Rolfe of the Central Queensland University found that 46 per cent of all the income generated by mining in the state, and 55 per cent of all contracts and community spending, flowed back to Brisbane via FIFO workers and contractors.86
In local communities, however, mining companies often take over where government is found wanting. Their big profits and relatively low tax rates allow them to operate as generous benefactors. They donate to local clubs and community organisations, and are often there in times of need. After floods, bushfires and cyclones, the big mining companies like BHP and Rio have made substantial donations to relief funds. Country Fire Association units rely on donations, and thanks to mining companies they have some of the best high-tech gadgetry money can buy. Coal companies in the Hunter Valley support mobile libraries and home reading programs; primary school children read books emblazoned with the logo of a multinational coal company. In Orange, New South Wales, home of the Cadia Valley gold mine, local councillor Fiona Rossiter says the company has been a ‘lifesaver for a number of projects’. She names two programs for disadvantaged children that had their funding cut by the state government; Cadia stepped in with a $500,000-a-year community program. ‘They are quite giving. I realise that’s because they make a lot of money and they have got plenty of profit, but they don’t have to,’ says Rossiter, a nurse and mother of eight children.87
The Cadia Valley mine, operated by Melbourne-based company Newcrest, is on its way to becoming the largest underground mining operation in Australia and the second largest gold mine in the world, under a $2 billion expansion plan approved by the state government. The local council and the state government were very keen to see the development go ahead, notwithstanding the city’s perilously low level of water. The expansion plan was approved while Orange was on the maximum ‘level 5’ water restrictions, even though the mine draws on local water courses and ground water. But Orange now looks to be a reasonably prosperous place, with new shopping malls and rising house prices. There will be a lot more largesse in Orange over the next thirty years, the expected lifespan of the expanded mine.
As Mrs Rossiter observed, these companies are not short of money, but we know less about just how much they are making and where it goes. Both industry and government have cut back the amount of information reported to the public in recent years. Until the 2006–07 financial year, the industry produced the annual Minerals Industry Survey, which showed exactly how much it was earning. But the report was discontinued, perhaps because it was starting to show an embarrassment of riches. The Bureau of Statistics also scrapped its detailed biennial publication on the industry, Mining Operations Australia, which means information on payments to states by mining companies is no longer obtainable in a single publication.
After painstakingly splicing together information from multiple sources, two RBA economists, Ellis Connolly and David Orsmond, have made up for these deficiencies. They looked at information available from the Australian Taxation Office, from federal and state government budgets and from the ABS to show us where the money goes.88 At the height of last decade’s boom, wages cost $11 billion, or 9 per cent of total mining revenue, which is very low when compared to other industries, and obviously reflects the highly mechanised nature of mineral production. The latest figures show that the industry employs 194,000 people, up 90,000 since the start of the boom, but this represents a tiny 1.7 per cent of total employment in Australia. Given that the industry produces at least 10 per cent of our GDP, mining is six times more capital intensive than the average business.
The study also showed that spending on inputs like machinery, transportation and catering soaks up $45 billion, or 38 per cent of revenue. Most of this spending probably goes offshore, given the heavy use of imported machinery. The study doesn’t quantify how much of these inputs are produced locally, but there are a few compelling indications. In its corporate video for the Pluto LNG project, Woodside boasts that its steel fabrication work was done in China. Chevron’s $43 billion Gorgon LNG project has been accused of sourcing just $3 billion of its construction contracts locally, contrary to company claims of $10 billion.
Ian Cairns, national manager of industry development for the Australian Steel Institute, an industry peak body, says Australian manufacturing has largely missed out on opportunities in the last five years. He says that all but 7,500 of the 260,000 tonnes of steel used in Chevron’s Gorgon project were fabricated overseas. The figures for Chinese-backed projects are even more extreme. Hong Kong-listed Citic Pacific’s Sino Iron project has had all of its 100,000 tonnes of steel fabricated in China, and it even imported concrete blocks from there, despite the prohibitive cost of shipping something so heavy. Under the federal government’s Enterprise Migration Agreements the company will be able to import most of its workers on low wages, despite union warnings about the risks of using poorly qualified workers who may not even speak fluent English. Cairns says the federal government could use Foreign Investment Review Board (FIRB) conditions to boost local involvement, but he expects that the industry will get very little out of the $70 billion being invested in coal-seam gas projects. Martin Ferguson, however, is unsympathetic: ‘It is not a gravy train to jack up your tender price thinking these investors have to accept your tender when you are eight to nine times higher than alternative bids from overseas. This argument that we can impose these sorts of additional costs on industry is rubbish.’
Before they make a profit, miners also have to pay royalties to state governments, which are the equivalent to a share of production. In this case, royalties are worth $7 billion, or 5.8 per cent of revenue. This leaves a gross profit of $56 billion, or 47 per cent of revenue, which is a very decent margin indeed. From this amount, the companies paid $8.1 billion in federal taxes, leaving a net profit after taxes and royalties of $48 billion. In this study, taxes and royalties as a share of net earnings amount to 26 per cent, which is definitely on the low side, especially given the boom conditions at the time.89 This level of profit translates into a very high return on capital, ranging from 24 to 32 per cent in the three peak years of the mining boom last decade.90
The mining industry argues that its tax rate is higher than that shown by the RBA study. In recent years big miners like Rio and BHP claim they have been paying tax rates on their gross profits in the range of 35 to 43 per cent. A study by the accounting firm Deloitte based on Tax Office figures shows that in 2007–09 mining companies paid a corporate tax rate of 27.8 per cent, which rose to 41 per cent when royalties were included. In the decade to 2009, the industry says, it paid $80 billion in tax, or about 38 per cent of its pre-tax cash revenue of $210 billion.
Concern about the effectiveness of taxation becomes greater when very high foreign ownership is factored into the equation. Foreign ownership of Australian mining and energy businesses, now around 80 per cent and rising, means that some of these high profits leave the country, a trend that is likely to accelerate as miners deplete our natural resources and run out of new investment opportunities. BHP Billiton claims to be only 41 per cent foreign owned, but that figure is derived by counting its shareholders by number, not how much each of them owns. More detailed analysis by Thomson Reuters puts the figure at 76 per cent, a figure quoted by its rival Rio Tinto in a submission to a Senate inquiry. Rio put its own level of foreign ownership at 83 per cent, while Xstrata is 100 per cent foreign owned.91 Official data on foreign ownership in the industry is now unavailable, after the ABS cut its annual publication on the topic in 1985. At the time (when foreign ownership of mining businesses was 50 per cent), it became unfashionable to produce such data.92 Since then, major Australian companies like Western Mining and MIM Holdings have disappeared. Further analysis by Dr David Richardson of the Australian Institute, and Naomi Edwards, an economics adviser to the Australian Greens, puts overall foreign ownership of mining in Australia at more than 80 per cent. Edwards has pointed out in a briefing paper for the Greens that foreign ownership will rise given the soaring value of mining projects approved recently by the FIRB. The value of approved projects has quadrupled in the three years to 2009–10, reaching $75 billion.93
Both Edwards and Richardson argue that mining is three times more profitable than the non-mining economy, and they see these profits being shipped offshore in the form of dividends. Currently the foreign miners are reinvesting because digging our dirt is highly profitable, but it is conceivable that they will eventually recover their retained earnings and assets when Australia runs out of resources. Based on Tax Office returns for 2008–09, Edwards puts after-tax profits at 26 per cent of revenue for miners, compared with 8 per cent for other industries. Richardson used ABS figures for 2009–10 to produce a similar picture of after-tax profits: 37 per cent of revenue for miners versus 13 per cent for non-miners. Edwards’s analysis shows that iron ore has become fantastically profitable, with after-tax profits at 48 per cent of revenue. These profit levels are generating handsome returns to foreign owners. Based on ABARES’s forecasts, Edwards predicts that foreigners will accrue earnings of $265 billion over the next five years, more than half of which will be earned by iron ore alone. More than $50 billion will leave the country as dividends.
Edwards, a former actuary who sidelines as a stand-up comedian, can find nothing amusing about the implications of foreign control of our resource wealth. She argues that this is driving a deficit in Australia’s net income balance, which is the difference between the earnings Australians make on their overseas assets and the earnings on foreign investment in Australia. Australia ran a positive balance until the mid-1980s, when it dropped to a deficit of about 2 per cent of GDP for the next two decades. The deficit is now heading for 6 per cent, or about $75 billion in net payments to overseas investors. Edwards isn’t raising problems about foreign ownership per se; the real issue is the nature of the mining business. If these companies controlled resources that were renewable, foreign ownership would be less of a concern; but the fast and highly profitable rate of resource extraction, combined with the lack of local asset development, threatens to leave us a greatly depleted nation when the resources eventually run out. Like Nauru today, but on a continental scale.
The boom that is now underway is potentially going to be bigger, longer and more profound than any of the previous four booms in Australia’s history. Without a more effective tax regime, Australia won’t be able to reap a legacy for the lasting benefit of present and future generations.