Fisher Investments Editorial Staff
Taxes

MRRTs From A to Z

By, 05/07/2013

 

Australian Prime Minister Julia Gillard probably didn’t smile this much upon hearing her surtax on miners’ profits raised only A$126 million in six months. Photo by Brendan Thorne/Getty Images.

Pop quiz: How can a third-world country jumpstart industrialization and overall economic development?

According to a leak of Zimbabwe’s proposed mining policy overhaul, the answer’s simple—slap miners with a minerals resource rent tax (MRRT) and deploy the huge expected revenues on a development blitz.

Well, before policymakers get too carried away, they might want to look across the Indian Ocean and see how much revenue Australia’s raised with its own MRRT. Or, more to the point, hasn’t raised—during the MRRT’s first six months, it raised only A$126 million (including a whopping A$0 in its first three months). And on Monday, the Aussie government slashed its full-year revenue forecast from A$2 billion to A$800 million.

Officials blamed the strong currency for hurting miners’ profit margins, but it seems some tax rejiggering by mining firms is a much more significant culprit. Last week, three of Australia’s largest miners said they plan to use nearly A$35 billion in tax credits to lower their MRRT burden. Since MRRT took effect, firms have used its competing clauses and generous allowances to minimize their payments. For example, taxes and royalty payments on resource extraction are deductible, as are expenses for mine construction. Mining firms can simply store up these credits and use them to offset MRRT as needed, paying little to no MRRT even if profits are healthy. Thus it’s tough to see how MRRT can meet even the reduced revenue forecast. Firms have an obligation to maximize shareholder return, which means taking advantage of every tax allowance they can.

Zimbabwe’s MRRT may be more difficult to skirt by shuffling tax credits around—even if firms find a way, the government has a history of retroactively reinterpreting its tax code and denying previously agreed-to tax deductions. Instead, a Zimbabwean MRRT likely would crimp investment—with less potential net profit, there’s less incentive for firms to spend capital on Zimbabwean projects.

Other provisions of the mining overhaul, which include giving the state near-complete control over resource development, compound this. Currently, miners are allowed to sell their own output and negotiate prices directly with the buyer—a largely free-market system. Under the proposed scheme, however, the state would reclaim “the power to market the people’s mineral assets.” The leaked plans say firms would be compensated “at fair and transparent market prices,” but the fine print also gives the government the right to control prices and restrict output.

The government claims this will ensure “open, transparent and competitive” mineral markets. This would be a dubious claim anywhere, but it’s exponentially so in Zimbabwe, with its thuggish regime, widespread corruption, weak property rights and weak rule of law. Add in escalating resource nationalism, and you have a very weak environment for investing and doing business. Zimbabwe’s mineral deposits are vast enough that some firms may deem staying there worth the hassle, just as some firms weren’t deterred by recent asset seizures. But the proposed changes likely don’t spur a windfall of new investment.

One would think policymakers would glean as much from simple common sense (not to mention many Latin and South American countries’ misadventures in resource nationalism), but the government’s aims seem as much political as economic. Zimbabwe holds elections later this year, and President Robert Mugabe’s Zanu-PF party is desperate to curry favor with voters and recapture a parliamentary majority (it’s shared power with the Movement for Democratic Change since the disputed 2008 election). The mining overhaul purports to end what the officials describe as a “colonial mineral regime,” which likely touches a raw nerve even 33 years after the civil war for independence ended. Resource nationalism could score big political points. But it probably won’t score big economic points. Which means officials likely still find themselves searching for ways to “use national mineral assets to underpin wider development and industrialization.”

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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