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Management Side
Technical Side

Taxing Questions

It is said that a week is a long time in politics, and so it has proved in Australia.

My report this month takes a look at the Resources Super Profits Tax that the Australian federal government announced without warning a few weeks ago. Ostensibly, this tax relates to nonrenewable resources such as coal and iron ore. However, the potential for such a tax to be applied to all resource industries has an almost magnetic attraction for politicians of all persuasion and in all countries; this kind of tax has the potential to become a contagion in all first world countries. It does not take too much imagination to conceive that such a tax could be extended to agriculture, and particularly to forest resources, as this represents a form of natural resource exploitation. Indeed, such a suggestion has been made by Australia’s Secretary of the Treasury. Banks and other industries that operate significantly under government license also have been suggested as prospects for application of this tax.

The fall-out from this proposed tax has been incredibly significant and unexpected, however. The government underestimated the power of the big mining companies. Mining is big business in Australia and the world’s largest mining company is headquartered here. The mining lobby quickly unleashed a barrage of advertising that convinced almost everybody that the tax was a dumb idea, or at least it had not been adequately thought through. A federal election is due shortly and polls indicated that the government would lose office, given that many Australians have stock in these companies or are employed by them. In probably the most ruthless and clinical political execution ever witnessed, certainly in Australian history, the Prime Minister was ejected from office by his own party in the hope that Australia’s first federal female leader who replaced him would restore the government’s popularity.

The super profits tax is now back at the negotiating table; some form of tax is still likely to be imposed, but presumably at an “acceptable” level. Anyhow back to the notion that such a tax could be applied to forest resources. The idea for this tax is not new and apparently can be attributed to E. Cary Brown, a professor and leading expert on fiscal policy and the economics of taxation. As a member of the Massachusetts Institute of Technology’s Department of Economics faculty for more than 60 years, he formulated this idea back in 1948. The idea behind the tax is that it can be structured to support projects in their developmental phase and then repay that support when the project becomes a going concern. It also pumps billions of dollars into tax revenue, which supposedly would be spent on national infrastructure to minimize overall project costs. It further suggests that the government would support industry in bad times through a tax refund, but of course, tax the life out of the company in good times. The trick is to apply a formula that would basically be tax neutral over the life of a resource. As proposed in Australia, the tax was not neutral for new projects and because it was retrospective for existing mines and it was decidedly tax accretive.

One commentator reported that the Treasury suggested “that such taxes offer a more neutral treatment at the corporate level of debt and equity and of investment decisions at the intensive margin, theoretically allowing a higher level of production than under the current system.” This surely is Treasury code that other sectors should be given the same “opportunity.”

The whole idea of this tax certainly demonstrates its academic origins. Until recently, only the most naïve person could ever imagine a government writing out checks to big companies when the economy was tanking – although I guess that is exactly what the U.S. and several European governments did during the recent global financial crisis!

And the concept of this tax has apparently garnered some support, as from Angel Gurria, secretary-general of the Organization for Economic Co-operation and Development. It is not inconceivable that some form of this tax could be applied to bail out some industries, while at the same time drive others to the wall! The devil, of course, is in the details, and as with most “economic instruments” devised by economists, politicians usually manage to ensure that there are unintended consequences because revenue rather than social outcomes eventually becomes the driver. Proposals for emission trading schemes, which could significantly impact the pulp and paper industry, are a good example of applying fiscal instruments as a tool rather than finding technical solutions.

The speed at which the government sought to introduce the super profits tax can be contrasted with the sedate pace at which recommendations of the strategic review of the Australian pulp and paper industry have been progressing since the release of the initial report that I mentioned in my last column. The problem, of course, is that there is the potential the government might indeed have to write some of those checks to support the forest products industry through restructuring so that the industry is strong enough to make a worthwhile contribution to the national economy in the future.

To date there has not been a lot of demonstrable progress. An Innovation Council for the Australian pulp and paper industry is slowly being developed. Some staff members have been recruited, but the Council is yet to have its inaugural meeting. The challenge is to ensure that the Council works as effectively as the Strategy Group that formulated the recommendations to secure the domestic industry.

Australia’s tissue manufacturers, particularly SCA Hygiene Australasia and Kimberly-Clark Australia, also are looking for evidence that the challenges for the industry are being recognized. These companies are appealing to the Federal Court of Australia to overturn a decision by the federal government to reverse a previous decision of Australia’s Customs to impose import duties on tissue products “dumped” into the Australian market.

Although it had been determined that dumping was occurring, the Productivity Commission, which advises the government had decided that there was no substantial injury to the industry and overturned the decision made in 2008 to impose duties on imports.

Significantly, PT Pindo Deli and Gold Hong Ye Paper (the companies allegedly dumping) have asked to join the matter so that they have the opportunity to state their case in court. The rate of imports of converted tissue products has increased dramatically over the last decade. Although a significant part of the increase is from SCA Hygiene Australasia’s New Zealand operations, it is the stellar increase in China-sourced tissue that is giving rise to dumping allegations.

It all goes to show that governments are quick to identify lucrative new tax opportunities, but behind the rhetoric they are reluctant to show the same enthusiasm for matters that impact a particular industry, unless there are votes involved. The problem seems to lie with the fact that governments impose taxes, but bureaucrats administer their application and other matters, such as regulation of trade. As a signatory to many free trade agreements, Australia seems reluctant to accept that there really is not a level playing field in the real world. The Australian industry will look with great interest to see how the USA ultimately resolves the paper dumping cases that are being considered at the present time.

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