The Rising Influence of Rising Affluence

[DewDiligence]

Australia Could Tax the Lifeblood of BHP, Rio Tinto

[Expropriation of assets, whether legally via unduly heavy taxation or illegally via outright seizure (as in Venezuela), is ever the risk in natural resources investing.]

http://www.ft.com/cms/s/0/fa24a7f0-0c74-11df-a941-00144feabdc0.html

›By Elizabeth Fry in Sydney, Paul Betts
January 29 2010 02:00

Reports that the Australian government plans to hit the mining industry with a new tax - which could cost BHP Billiton and Rio Tinto a combined $5bn a year - has spooked the industry and created further tensions between Canberra and the resource-rich states of Western Australia and Queensland.

A wide-ranging tax review has reportedly recommended that Canberra extract billions of extra dollars from the mining industry by scrapping the state-based royalties that are currently paid and slapping a 40 per cent resource rent tax on operating profit.

Basically, the resource rent tax would extend the scope of an existing petroleum resources rent tax that is levied on petrol products to additional minerals such as coal and iron ore. Currently, state-based royalties grab 2-10 per cent of mining revenue.

Back-of-the-envelope calculations by Merrill Lynch suggest that if a 40 per cent resource rent was applied, BHP could lose about $2.6bn a year from 2012 to 2016, a 16 per cent drop in full-year earnings.

Rio would take the biggest hit, losing about $3.01bn a year in the same period, a decline of 25 per cent.

Neither of these scenarios includes the prospect of a corporate tax cut.

The leaked documents are viewed to some extent as a kite-flying exercise to gauge industry vitriol as well as the ferocity of industry push-back, but it is also felt that where there is smoke, there is fire.

Moves to increase the tax take from the burgeoning resources sector have been under way for years. Even if a 40 per cent tax on operating earnings is a worst-case scenario, most industry insiders are bracing themselves for a much larger tax grab than is currently the case.‹