Have the Federal Government targeted the wrong man with its controversial resources super profit tax? While the proposed tax endeavours to ensure that the mining industry is paying its fair share of tax, the same Government has provided unprecedented assistance to another very profitable sector and I particular, one company – Macquarie Bank. Not only has Macquarie Group been an extremely profitable business in recent years, but the rate of tax it pays is far lower than Australia’s much maligned mining companies.
The RSPT was predicated largely on two bases. Firstly, that the mining sector has been able to generate ‘super’ profits and don’t pay enough tax. Second, that those profits were earned through the exploitation of resources which are the property of all Australians. While there are other aspects to the proposed tax (including replacing the inefficient state-based royalty regime and high levels of foreign ownership of mining companies) they are of less relevance.
Addressing the second point first – while it is true to claim that mining companies extract non-renewable resources, it can also be argued that miners need to outlay billions of dollars to create the infrastructure which allows those minerals to be exploited. Therefore, not only do mining companies give Australia’s natural assets like coal and iron ore a real value, but those minerals are then sold to other businesses and ultimately consumers. Effectively, the mining companies are being targeted because they happen to be the first (and most visible) link in a long chain of production.
Now consider the first point – do mining companies really generate ‘super’ profits and are they taxed fairly? The best way to determine the profitability of a company is to determine its return on equity – this is the percentage return which a shareholder receives for investing in an asset. (The amount of tax a company pays can be found in its annual financial statements).
An insight can be found by comparing the return-on-equity of Australia’s two largest mining companies (and the companies which would provide the bulk of the revenue collected from the proposed RSPT) BHP Billiton and Rio Tinto, with that of Australia’s largest investment bank, Macquarie Group.
Between 2004 and 2009, BHP generated a return on equity of 33 percent and Rio a return of 28 percent. Over that same period, Macquarie generated a return of 23 percent on shareholders’ funds. However, while BHP and RIO out-performed, they were largely boosted by record commodities prices – in 2009, as commodities prices retreated, their returns dropped sharply to 16 and 12 percent respectively.
More importantly, the relative tax rates paid by BHP and Rio far exceeded the tax paid by Macquarie. Between 2004 and 2009, BHP paid taxes and royalties of US$23.7 billion based on earnings of US$80.5 billion, this means BHP’s effective tax rate was 30 percent. RIO was similar, earning profits of US$48 billion and paying more than $11 billion in tax (equating to a tax rate of just over 23 percent).
However, the tax rate paid by Macquarie was far lower. Despite earning profits of $8.2 billion between 2004 and 2009, Macquarie paid a mere $1.4 billion in tax – meaning that Macquarie’s effective tax rate, courtesy of some smart tax practices, was a mere 18 percent. This was a little more than half the tax rate paid by BHP and less than a third of the rate of tax which mining companies would be required to pay if the RSPT is introduced.
However, not only did Macquarie Group pay an extraordinarily low rate of tax, it also benefited from a range of favourable government policies. As the global financial crisis was causing turmoil in September 2008, Macquarie CEO, Nicholas Moore is understood to have met with Financial Services Minister, Nick Sherry and spoken with Federal Treasurer, Wayne Swan. Within weeks, the Federal Government would introduce a wholesale funding guarantee, in which banks like Macquarie were able to rely on Australia’s AAA credit rating and obtain tens of billions of dollars in foreign funding. In addition, the Federal Government agreed to an unlimited guarantee on bank retail deposits.
Meanwhile, other Macquarie executives, including the head of its Markets Division, had extensive contact with ASIC. Within days of Macquarie’s lobbying, ASIC took the unprecedented step of banning short selling of publicly listed financial companies – a move which led to a 9 percent surge in Macquarie’s share price.
By contrast, throughout the global financial crisis, Australian mining companies, including Rio Tinto and Oz Minerals, which faced near collapse, were left to fend for themselves, forced to raise equity at a substantially discounted prices from Chinese investors and receiving no Government assistance.
Now, as the commodities boom temporarily re-occurs, the Federal Government is relying on mining companies to ensure that is able to transform its budget to surplus. It appears that the Federal Government has one rule for taxpaying miners, and another rule for the hard lobbying Martin Place bankers.
for The Daily Reckoning Australia