Rio Tinto released a report on the tax it paid around the world in 2014 this morning.
It contains an explanation of “Payments to governments and the mining life cycle” which highlighted the different phases that mines move through, and how this affects the taxes that flow from them.
It’s a case study that looks at the Kennecott Utah Copper which has been in operation since 1906 compared to the Oyu Tolgoi mine which has been operation in Mongolia since 2013.
As much as it’s a case study of two mines offshore, it helps illustrate that the transition in Australia from mining investment boom to mining production boom (with record volumes flowing through Port Hedland) is not the bad news many suggest.
Here’s Rio great explanation of how the tax take changes through the mining life cycle.
The first phase, exploration and evaluation: payments to governments will typically include employment related taxes for small project teams. Payments may also be made for permits, fees and licences.
In the second phase, design and construction: payments to government significantly increase. Customs duties and other indirect taxes are imposed on the construction of the mine and acquisition of plant. Higher employment related taxes reflect a larger workforce on the construction project.
In the third phase, the mine begins and continues operations: government royalty payments start shortly after commencement of operations. Corporate income tax payments are profit based and may be subject to significant fluctuations resulting from commodity price volatility. In the early years of the operating phase, as annual tax allowances for capital construction expenditures are higher, there may be no corporate income taxes paid. As annual tax allowances for capital construction costs are amortised, corporate income tax payments increase. Import related payments decrease compared with the construction phase.
The final phases are final closure and post closure: payments to governments in the will be significantly less than in the operating phase.
Australian iron ore and LNG production is either in or soon will be in the operations phase. Global prices may be down but with productive capacity online the mining production boom looks set to make a massive contribution to Australia’s fiscal position in the years ahead.