Goldman digs up some resource tax reality

Given the polarising debate about resource rent taxes over the past 2½ years a recent Goldman Sachs research report on the sector's taxes globally helps provide a useful context for the local debate.

Goldman's analysts were looking at mining taxes in terms of the threat posed by growing resource nationalism to miners. Their key premise is that there is a material risk that countries which currently have tax takes below the global averages will increases their taxes on miners and it also says there is some risk that mining royalties will close in on those imposed on oil, where the average royalty differential is 15 per cent higher.

Within the data supporting the analysis there is a comparison of royalty rates and other taxes within all the major mining jurisdictions that does help assess where Australia's taxes sit within the global resources sector.

The controversial and, as yet, non-revenue-generating Minerals Resource Rent Tax, applies to iron ore and coal. While iron ore has rebounded from last year's depths of below $US90 a tonne to just above $US140, and coal prices are also significantly off their lows (although their recovery hasn't been as significant) the various credits within the tax make it unlikely it will provide any meaningful revenue in the near term and salvage Wayne Swan's recently-abandoned surplus.

With China's economy lifting on the back of 20 per cent-plus growth in infrastructure spending and more stable property markets the outlook for commodity prices is more optimistic than it was in the latter stages of 2012.

It is unlikely, however, that they will return to their bubble-like highs and probable that, even if the current prices are sustained, that the MRRT will produce only modest revenue into the medium term.

Overall, the average global royalty rate is 3.9 per cent. The average rate in Australia is 5.6 per cent. The average total tax take around the world is about 39 per cent; Australia's is about 42 per cent. The Philippines, Ghana, Zambia and India have higher overall tax rates but the Australian "take" is in line (albeit slightly higher) with similar developed economies like Canada and the US.

On iron ore, the Goldman research shows that Australian royalty rates average between 6.5 per cent and 7.5 per cent. While the global average royalty rate is 7.7 per cent, our biggest competitor, Brazil, applies an average royalty of 4 per cent.

For coal the average royalty rate globally is 5.9 per cent. In Australia it ranges from 7 per cent to 12.5 per cent. South Africa's average rate is 5 per cent, Brazil's 2 per cent, the US between 8 per cent and 12.5 per cent and Indonesia, a growing producer, 13.5 per cent.

That would suggest that, even without the MRRT, the Australian iron ore and coal producers are at the upper end of the global resource royalty and overall tax scales.

The MRRT, of course, was designed as a "super profits" tax and given that the resource sector is shifting from price-driven profitability to volume and cost-driven profitability the mining sector is unlikely to be generating super profits any time soon.

State-based royalties are mainly volume-driven, so the new era is likely to see the absolute revenues generated from the sector continue to rise, even if most of that growth doesn't make its way to Canberra.

The big resource companies, like BHP Billiton and Rio Tinto do, of course, operate globally and there do face the risk that those jurisdictions with below-average tax takes will seek to push them up towards or beyond the global averages despite the fact that most of the lower tax regimes are in higher-risk environments. The Goldman analysis found that the tax takes didn't correlate with risk.