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  • Australia is world’s highest taxing iron-ore jurisdiction

Australia is world’s highest taxing iron-ore jurisdiction

17 October 2016

By Semole Matlhoma, Tax Consultant, BDO SA

In August 2016 the government of Western Australia (WA) announced plans to introduce an AUD 5 per tonne rental fee on the production of iron ore in Western Australia. This is separate from and in addition to the 7.5 per cent royalty paid on the value of iron ore sold. Currently iron ore mining companies in WA pay a 25c per tonne production rental fee, which has remained unchanged since 1960.

As of 4 September, the Mineral Council of Australia and Chamber of Mines and Energy in Western Australia estimated that the new tax will result in an increase in taxes on iron ore of AUD 7.2 billion. Dr Jack Mintz, an analyst of international corporate tax regimes, is of the view that the tax will result in WA being the “world’s highest taxing iron ore jurisdiction”. The current mining marginal effective tax and royalty rates for iron ore producers (2015 stats by Dr Jack Mintz) places Australia in third place at 37% and South Africa in second place at 38.3%.

This proposal elicits the following observations:

  • A tonnage tax is more inelastic than a royalty as it stays constant regardless of prices, whereas royalties paid based on value increases and declines proportionately in line with the price received;
  • If prices decline some mines will reduce production, but there is a time lag between the price decline and the reduced production; and
  • This tax discriminates against high volume low margin producers as they rely on high volumes to make profits.

The South Africa government revised its expected revenues from mineral royalties downwards due to a decline in the sales value of minerals mined. As a result, the South African Chamber of Mines requested government to consider granting royalty relief to loss making mines. In terms of the South African Mineral and Resources Royalty Act which became effective in 2010, a royalty is calculated on the value of minerals sold, at a minimum rate of 0.5% with a maximum of 5% or 7% depending on whether the mineral is refined or not. Mineral royalties are paid on all minerals mined in South Africa, including some that are not covered in the mining provisions of the Income Tax Act, such as the quarrying of granite.

A fine balance exists between taxing mining companies and encouraging new investment, as each new project is evaluated at the feasibility stage by considering its potential to deliver an acceptable after-tax return on the capital invested over the life of mine.

The media release of the Chamber of Mines and Energy of Western Australia stated that Western Australia would officially become the least attractive destination for mining investment in the world.

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