How much should mining and oil companies pay the government when they extract copper or oil from publicly owned land and sell it?
It’s the sort of apparently simple – but really fiendishly complex – question that professors at the London School of Economics like to put on final exams. (They asked Yukonomist how much cigarettes should cost.)
Australia’s feisty Labour prime minister Kevin Rudd has brought the debate to the front page with his new Resource Super Profits Tax. This will kick in on July 1, 2012 and will charge a 40 per cent tax on “super profits,” defined as profits over and above the return on a 10-year government bond, made from exploiting nonrenewable natural resources.
The tax is expected to bring in $12 billion (Australian) in its first two years. Some of the money will be used to lower corporate taxes for nonresource companies.
The measure has caused CEO blowouts around the world. Clive Palmer, a mining CEO from Queensland, told media his opposition “will be an ongoing campaign for me for the rest of my life.” Rio Tinto CEO Tom Albanese told Mining Weekly he was “shocked” and used shareholder-worrying terms such as “nationalization” and “expropriation” to describe the tax scheme. He has ordered Rio executives to reevaluate all Australian investment plans. Mick Davis of Xstrata said it was the “biggest assault on the mining industry I have witnessed.”
Miners are also angry that, although the tax is labelled as a tax on “super profits,” it sets the bar for “super” very low at the return on a 10-year government bond. Australia’s equivalent tax on oil extraction sets the bar five percentage points higher (15 for exploration projects).
The reason setting tax rates for nonrenewable resource extraction is so difficult is that governments face a trade-off: on the one hand, they want to encourage investment and job creation, while on the other they want to get as much tax revenue as possible. In the words of The Economist magazine, the debate is whether the super-profits tax will kill the golden goose or turn out to be just an “innocent egg-collecting operation.”
In another famous goose metaphor about taxes, French Finance Minister Jean-Baptiste Colbert once described his job as extracting the maximum of feathers from the taxpayer with the minimum of hissing.
The Australian PM has clearly decided that, given Australia’s resource wealth and booming commodity prices, he can jack up taxes and – despite the hissing – the mining companies will keep operating in Australia. He was also worried that the boom in mining would distort the structure of the Australian economy, something some Canadian economists have pointed out as the oilsands boom has sucked capital and labour to Fort McMurray from other parts of the country.
The Australian Treasury looked at resource tax systems around the world. It’s complex and difficult to compare, but the Australians think most Canadian provinces have rates that work out to under 20 per cent of profits. Norway’s effective tax on oil resources, on the other hand, works out to 78 per cent.
A few cheeky Canadian commentators have pointed out that this might be a great chance to steal some investment dollars from the Australians.
Here in the Yukon, our renewable resource tax policy is weighted towards attracting investment. Our corporate tax rate is 15 per cent and, important to miners, we have the lowest gas and diesel taxes in Canada. The total “Land and Mineral Leases and Royalties” expected to be collected by the Yukon Government in 2010/11 is only $162,000; barely enough to cover the minister’s junkets to China to attract more investors.
On gold, the Yukon charges a royalty of 2.5 per cent of the gold’s value. But in a historical quirk, the Yukon government uses a notional price of $15 (US) per ounce instead of current market rates which have surged to around $1,250 (US). This means the royalty works out to around 0.03 per cent.
Plus, under our complicated financial arrangements with the federal government, if the Yukon ever does start generating significant royalties most of the increase will end up in Ottawa.
Given the Yukon’s need to lessen its dependence on federal transfer payments, our investment-friendly stance makes sense. You can’t collect eggs until you have a goose. (Things may be different in Alberta, where many observers wonder if the province is collecting the most it could from Fort McMurray’s gigantic energy business.)
It will be interesting to watch if the mining industry really does migrate away from Australia, and if this makes the Yukon relatively more attractive.
Then we might generate some meaningful mining royalties of our own.
Assuming the projects get permitted, of course.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s