Miners criticize Canberra's mining tax plan as "destructive"

May 26, 2010, 5:54 GMT

Sydney - Canberra's plan to hike taxes on mining companies 'has the potential to destroy Australia's hitherto excellent reputation in the global community,' resources giant Rio Tinto Ltd said Wednesday.

From 2012, the Labor government intends to replace royalties and corporate tax that for Rio Tinto bring its effective tax rate to 35 per cent with a 40-per-cent 'super-profits tax,' triggered when earnings climb above the long-term bond rate of 6 per cent.

Rio Tinto, which raises 60 per cent of its revenue in Australia, has joined with other miners in funding a media campaign against a change it claimed would take the total tax take to 57 per cent.

'I don't say these words lightly, and I'm very keen to work with government to get to the right policy outcomes for the industry and the nation,' Rio Tinto chairman Jan du Plessis told a Melbourne meeting of shareholders. 'However, a retrospective taxation raises sovereign risk and will, as sure as night follows day, increase the cost of investing in this country for the next generation.'

Rio Tinto, along with market leader BHP Billiton Ltd and iron ore rival Fortescue Metals Group, has put projects worth billions of dollars on ice because of the proposed tax change.

The opposition Liberal Party opposes the switch from per-ton royalties on what miners dig out of the ground to a world-first taxation regime in which the government described itself as becoming a 'silent partner' in projects by granting a tax credit of 40 per cent on any losses companies incur.

The Liberals intend to fight a general election that must be held before the end of this year on the issue.

A group of well-known economists has come out in support of the changes, claiming the miners are bluffing when they claim investment would be driven offshore and tens of thousands of jobs lost.

'They're paying the wrong kind of tax,' said Allan Fels, former chairman of the Australian Competition and Consumer Commission. 'Having royalties on production actually deters production. If you simply tax excess profits, then there's still a strong incentive to produce and look for resources and so on because you'll still make very substantial profits.'

The imbroglio has wiped billions of dollars off the value of mining company shares and helped drive the value of the Australian dollar against the US dollar to a 10-month low.

Some analysts were predicting a compromise in which the 6-per-cent threshold at which the tax kicks in is raised in return for mining companies foregoing tax credits for expenses incurred in failed projects.

But the government rejected a compromise with Treasurer Wayne Swan declaring, 'Nobody should doubt the government's resolve to make sure the community gets a fair share of the mineral resources that belong to the Australian people.'

Minerals make up 30 per cent of exports and the mining sector 18 per cent of Australia's gross national product.