Mineral Resources Taxation Flashcards
What is the Function of the Government?
The government, on behalf of the community, transfers exploration and production rights to the private sector in return for some payment. These payments are generally known as royalties 1
.
What are the roles for state and Commonwealth?
The Commonwealth is responsible for oil and gas resources located offshore, outside of the three nautical mile territorial sea limit but within the 200 mile Exclusive Economic Zone (EEZ), as well as for uranium resources in the Northern Territory. State and Territory governments are responsible for other mineral resources located in their respective jurisdictions.
Resource taxation Categories
Profit-based royalties and Output-based royalties
Profit-based royalties:
which are levied on the net cash flow or profit of a resource project.
Brown tax
the government collects a constant percentage of a project’s net cash flow in years in which profits are earned and provides cash rebates to investors in years of negative net cash flow
The Resource Rent tax
similar to the Brown tax but no compensation is paid in years of negative cash flow. Instead, losses (or negative cash flows) can be accumulated at a threshold rate and offset against future profits
Output-based royalties
which are levied on the volume or value of production of a resource project
ad valorem royalty
involves the government collecting a constant percentage of the value of production;
specific royalty
involves the government collecting a constant (dollar) amount per physical unit of production
Economic rationale for resource taxation
The economic rationale for resource taxation is based on the presence of resource rent in the mining sector. Each input to a productive process earns a return – for example, owners of capital earn profit, owners of land earn rent, and workers earn a wage in return for the provision of their labour services. Similarly, it is reasonable the owners of mineral resources should expect to earn a return from the extraction of resources.
Resource rent:
Resource rent is typically assumed to be equal to economic rent in the mining sector. The economic rent in an economic activity is the excess profit earned in a competitive market, and is equal to the excess of revenue over costs where costs are defined to include a ‘normal’ rate of return on capital. This ‘normal’ rate of return may be interpreted to be the minimum rate of return required to hold capital in the activity, and includes an allowance for a risk premium since private investors are usually assumed to be risk averse. Further, resource rent in the mining sector may persist in the long-run due to the quality or scarcity value of different ore deposits or fossil fuel fields.
What is the objective of resource taxation policy?
is assumed to be to collect a reasonable share of the resource rent at least cost, where costs may include administrative costs and losses incurred through negative distortions to private exploration and development decisions. That is, resource taxation policy options are assessed on the basis of administrative costs and economic efficiency.
tax is weakly neutral
A tax is weakly neutral if it does not alter the rankings of alternative risky projects for an investor
A tax is strongly neutral
A tax is strongly neutral if it satisfies weak neutrality and does not change the decisions of investors relating to which projects will proceed and which do not (that is, it does not change the cut-off point between projects that would be undertaken and those that would not
