The Minerals Resource Rent Tax had failure written all over it right from the start, writes Elizabeth Knight.
The iron ore magnate Andrew Forrest was travelling around the isolated wilds of his mining operations in the Pilbara on Wednesday when, despite the limited phone coverage, a call came through. It was the independent MP Andrew Wilkie and he was offering his apology.
The Tasmanian former Green was responding to Wayne Swan's freshly minted admission that the centrepiece of his government's revenue-raising collection, the Minerals Resource Rent Tax (MRRT), was going to add only $126 million to its coffers rather than the $2 billion projected for last year.
On Thursday night, about 24 hours after this conversation, Rio Tinto admitted it paid no MRRT last year.
Wilkie was shamed by the fact he had supported Swan's mining tax despite warnings from Forrest that it was flawed and would let big miners off the hook and place the onus on smaller developers.
In late July 2010 Forrest started a roadshow - his mission was to convince a few politicians that the proposed MRRT was a fiscal con job.
The targets for his campaign were the crossbenchers, Tony Windsor, Rob Oakeshott and Wilkie.
Forrest's visits spanned the corridors of Canberra to country electoral offices, but he could get no support.
This tax pilgrimage included many meetings with Swan, whose support for the MRRT was unshakeable and whose response to Forrest's persistence was defensive and venomous.
The West Australian miner said Swan told him: "If you don't like it [the MRRT], you can take your state and secede."
It set the tone for a two-year brawl between the campaigning iron ore producer and the Treasurer.
"Mr Forrest is campaigning against a resource rent tax which is going to be used to fund tax breaks for 2.7 million small businesses and a big boost to superannuation for working Australians, and he is seeking to actually stop that from happening," was one of Swan's numerous public criticisms.
In response to it being called a mining tax, Forrest countered, "That's such an oxymoron. It's not a mining tax, it's a tax on juniors, a tax on explorers, a tax on exactly the part of the economy you want to encourage and it lets off the big guys."
But how could Swan's revenue numbers have been so at odds with those done by Forrest's company, Fortescue Metals?
Swan promised on the announcement of the tax policy that it would raise close to $13.5 billion over three years - the bulk of which would come from the three largest iron ore/coal miners, BHP Billiton, Rio Tinto and Xstrata.
Rio has now stated its position and remarks made by BHP suggest the amount paid by the majors seems to be next to nothing.
The new consensus, shared by just about everyone but the government and consistent with the views of its original detractors, is that the MRRT's structure is flawed. It has a built-in tax shield protecting - in particular - the profits of large established miners, which are able to revalue already depreciated assets and use this as an offset against future profits.
In the accounts, this is recognised as a net income-tax benefit or a deferred tax asset, which in the case of BHP and Rio amounted to a total arsenal of $1.7 billion against any mining tax liabilities.
In essence, it is a war chest that can be used to soak up MRRT profits. Exactly how each company calculates its deferred tax asset is not clear, nor does it seem to be consistent across all mining companies.
The extent to which the MRRT allows mining companies to offset tax is in part a function of these revaluations on their coal and iron ore assets - the amount by which the new "market value" exceeds book value. But the dollar amount of the revaluations does not need to be made public.
An industry source conceded to Fairfax Media this week that the market value "came down to judgment".
For such an ineffective tax policy to have been devised by a government attempting to maximise revenue appears counter-intuitive. For it to have earmarked the proceeds of the tax is fiscally irresponsible.
Whether the government was complicit, gullible or blindsided is a matter for conjecture. It was certainly expedient.
Back in 2010, it needed to reach a truce with the big miners, which were engaged in a deadly public campaign to get rid of the already announced super mining tax or topple the government.
The compromise deal with the miners agreed by Julia Gillard as a pre-cursor to her successfully challenging Kevin Rudd for the party leadership allowed them to devise their own replacement tax.
A BHP Billiton executive, Gerard Bond, actually sent a copy of the draft MRRT agreement to Swan's office a couple of days before the policy was unveiled without any input from Treasury. It had evolved out of a series of secret meetings between Gillard, Swan and representatives from BHP, Rio and Xstrata.
By the time the MRRT was announced less than a week later, the government was claiming the revenue it stood to raise was only a fraction less than what would have been raised by the tax's predecessor, the resource super profits tax. If this was likely, it was implausible the miners would have agreed to it.
To achieve these heady revenue collection estimates involved an inspired use of smoke and mirrors, and optimism. The assumptions around the price of iron ore, coal and the currency had been massively enhanced to achieve a palatable fiscal outcome.
For the most part, these assumptions went unchallenged by the media, which was distracted by the political coup.
Swan's subsequent hosing down of the tax collection estimates has been incremental. But it wasn't until a week ago that the government finally confessed its revenues from the MRRT had fallen massively short of the $2 billion figure contained in even its relatively recent watered-down projection.
Even the Minerals Council of Australia issued a warning last June about the folly of trying to estimate how much revenue the MRRT would raise. It had commissioned a report that said the tax take depended heavily on the exchange rate and commodity prices, making revenue forecasts volatile and difficult.
At the same time, a seasoned resource analyst from UBS, Glyn Lawcock, raised questions around the ability to meet the forecasts, given the number of unknowns and the potential profit shield that could arise from mining companies revaluing assets at mid-2010 market values, when commodity prices were very high.
From the perspective of BHP and Rio, the design of this tax is entirely appropriate because it allows them to apply a value to the billions of dollars invested over years into developing their mines. It was a feature they argued was lacking in the resource super profits tax.
The government defends the structure of the MRRT, saying the shortfall is nothing but a reflection of lower commodity prices and a higher Australian dollar.
Rio's new chief executive, Sam Walsh, was singing from the same song sheet on Thursday evening, saying the MRRT instalment fell due last October when iron ore and coal prices had fallen into a hole. He said it was designed to be a tax on super profits and was living up to its design. "We are paying our way ... and we are meeting our legal obligations."