Tuesday, March 18, 2014

Rio Tinto’s alchemy: turning iron into oro

LAST year Rio Tinto poured $6.3 billion in tax into Australian federal and state government coffers. It paid a further $1.3 billion in personal tax on behalf of its workers.

BHP Billiton, bigger and more profitable, would have paid even more. Our two big resources groups would have paid considerably more tax overall than the four big banks.

The difference is the royalties they pay state governments. Both miners and banks pay the same 30c in the dollar company tax to Canberra; only the miners pay royalties.

Last year Rio paid $3.5 billion in company tax. It paid $2.2 billion in royalties to state governments, with easily the biggest cheque going to Western Australia, thanks to the Pilbara.

The ironically well-named Rio Tinto started corporate life near a river in Spain that flowed red due to acid leaching from its copper mine.

It has long since evolved into a company which now gets almost all its profit not from a red river, just from that red earth of the Pilbara, almost literally — using that word just a little loosely — turning iron into oro, the Spanish word for gold.

Indeed, were the iron ore price ever to go back to $US180 a tonne, I would suggest the company seriously consider changing its name to Tinto Oro.

For some years now Rio has produced a breakdown of the taxes it pays around the world. Its latest shows it paid a total of $US7.5 billion ($8.3 billion) last year.

Of that, the biggest chunk — $US5.7 billion ($6.3 billion) was paid in Australia. Canada came a long way second at $580 million, followed by Chile at $422 million and then Mongolia at $244 million.

Rio’s CFO Chris Lynch commented that the company’s tax strategy and payments were central to its approach to “achieving sustainable development for the long term as a business, as a sector and as a global citizen”.

This report and these numbers demonstrated the significant contribution Rio made to “public finances in the countries where it operates around the globe,” he added.

He could just as well have said, Rio ain’t no Google.

That’s one of a series of big messages that come out of the Rio numbers.

It not only has real, tangible operations in various countries, it actually pays taxes in those very same countries.

That’s unlike companies that operate in virtual reality, which can generate a lot of revenue in a country but can more easily “disappear” into the globalised ether any profit linked to that revenue.

Even if you took the cynical attitude that the Rios of this world would emulate the Googles if they could, the harsh — comforting — reality is that they can’t.

Or, at least, they can’t as easily.

It’s that little bit easier for tax authorities to keep their fingers on revenues and profits that flow from tangible things like iron ore mines and shipments to China.

Secondly, we can thank out lucky stars — to the tune of $6.3 billion for Rio, perhaps something like $16 billion-plus for just Rio and BHPB combined — that we’ve got them here.

That Australia and its taxes are built on resources reality not on virtual hype.

There’s a great deal of blather spoken about how we should develop the virtual reality industries of the 21st century. The Rio numbers suggest there’s lot to be said for having some dull old industries that go back into the 19th century and even earlier.

Wouldn’t it be wonderful to have more Googles that paid “virtual reality” taxes? Not if we then had to ask people to take their health care, education and social welfare in “virtual reality” as well.

The associated point about this is that companies like Rio pay real dollar taxes in places like Mongolia that really need the money. If Google doesn’t pay any tax in Australia, I doubt it’s paying much in Mongolia.

The next number to focus on is that $2.2 billion Rio paid in royalties to state governments. How much did it pay in Julia Gillard and Wayne Swan’s resources tax? Zip, zero, absolute nada. Again, a royalty tends to be more tangible than some form of super-profits tax. A company like Rio pays so many dollars for each tonne of iron ore it digs up; there’s no complex calculation of what constitutes a super-profit.

The broader point is that Rio — and BHPB and all their fellow resources groups — are already paying a super profits tax, and always have been. That’s exactly what a royalty is; on top of the company tax.

The whole Rudd-Swan-Gillard resources tax debacle is, incidentally, another chapter in that great saga of the arm-wrestle between politicians and bureaucrats on the one side, and business and professional advisers on the other.

Is it really a surprise who comes out on top? Yet with that naive hope over experience, we keep thinking that next time the bureaucrats are going to outsmart the, well, smarties.

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