China cooks up own tax reform plan

[] — THE world’s largest miner, BHP Billiton, has responded to the Australian government claiming its proposed Resource Super Profits Tax (RSPT) lacks any of the fundamentals required of sound tax reform.

That may be true, and there could be a few iterations of the proposals before anything concrete is decided. An interesting report from Goldman Sachs, however, raises the interesting question as to whether resources tax of this ilk may have a positive effect on metal prices.

It also comments on proposed royalty taxes in China which, like Australia, is an important supplier of metals.

Said Goldman Sachs: “Changes in tax regime can impact metal prices in two ways. First, for countries with swing capacity that sets the marginal cost of production, taxation in the form of government royalties can affect near-term, cyclical prices directly through cost-push inflation.

“Second, tax changes can have an impact on structural prices by raising the price needed to motivate new production in capital-intensive industries with long investment horizons and volatile operating margins (made more volatile with changing tax rates).’

I doubt whether an uptick in metal prices would help offset the effective tax increase BHP Billiton, Xstrata and Rio Tinto would suffer from the RSPT – 57% from 42% it has been suggested – but resource nationalism is adding to the difficulty of sourcing fresh or continued supply of metals.

The RSPT is a particularly headline grabbing event, but Alberta’s “Our Fair Share’ oil and gas royalty review in 2008, and similar proposals to capture more resource rents, as Goldman Sachs terms it, have been seen in Chile and Brazil.

And now China. According to Goldman Sachs, China is considering reforming its resource tax regime from the current 1993 tax regime which charges levies on quantity of production, in favour of levies on value of production. The intention is to “. better reflect the supply-demand economics’, says Goldman Sachs.

“As China is a swing supplier of many commodities, we believe that this shift has the potential to increase the marginal cost of production and, in turn, lend incremental support to prices,’ the report said.

This would be a comfort to investors watching the recent selloff in base metals from about April which Goldman Sachs believes is only a temporary reaction to distress in certain Eurozone economies.

Finweek columnist Vic de Klerk believes, however, that the 6% decline in the copper price earlier this month and improvement in the gold price from the $1000 mark to the $1200 per ounce level is more ominous to metal prices in general.

Plotting the metal prices of both on a single graph he concluded that somewhere around March, the gold price was warning that too much money was being printed, especially the euro while the waning price of copper was saying “.. prospects were fading for world economic growth’.

While I accept the well acknowledged, fundamental relationship of gold to money – investors buy gold when they lose confidence in money – I don’t really believe prospects are fading for world economic growth.

The property bubble in China and the likelihood the economy, expected to record double-digit GDP growth this year, will be cooled does not for a minute indicate anything other than another sustained bull run for metals. Hence the taxes.

Closer to home, this is the first year that miners in South Africa will be paying their own new found tax, the royalties described in the controversial Royalty Act which was promulgated in 2008 but only applied from May this year following the hiatus of the 2009 recession.

As China is a swing supplier of many commodities, we believe that this shift has the potential to increase the marginal cost of production

Attorney Bell Dewar says there have already been some amendments to the Royalty Act, mostly of a benign nature.

For instance, a company that wins or extracts metals and then exports them for beneficiation only to reimport the matte would not trigger any royalty. No names are mentioned but one can only summon Northam Platinum to mind which exports concentrate to Heraeus and reimports a beneficiated product.

Another amendment is actually an exclusion and allows, for instance, Impala Platinum to “sell’ matte to its sister division, Impala Refining Services without incurring a royalty on that sale.

It sounds highly specific, but legislation of tax reform isn’t by any means a joy ride. One only wonders how South Africa’s smaller companies such as its juniors are going to cope meeting the full letter of the law on the Royalty Act.