When an expert from inside the industry as a guest of the minerals council reckons we're nuts with the way we do tax..._
PRRT too 'generous', says expert_
by Joanna Mather
_An international expert says the exploration incentives that Australia offers to oil and gas companies are "excessive", as analysis by Citi shows a 10 per cent royalty would generate $3.96 billion over the next five years. _
University of Calgary economist Jack Mintz, who is in Australia as a guest of the Minerals Council, said the petroleum resource rent tax (PRRT) was too generous. It is under review following a halving of revenue to about $800 million a year.
"The PRRT ... in my mind was too generous for exploration, particularly," Professor Mintz told The Australian Financial Review.
_"It has very high carry-forward rates for unused deductions – excessively high." _
Former Labor frontbencher Craig Emerson, who helped design the PRRT, agreed deductions for exploratory activities should be pared back. The PRRT provides uplift for exploration costs at the long-term bond rate plus 15 per cent.
"It could be argued that 15 percentage points is now overly generous," Dr Emerson writes in today's Financial Review.
For future exploration, it could be pared back to 5 percentage points to align it with the treatment of development expenditure."
_The government review is headed by Mike Callaghan, a former executive director of Treasury. A report is due in April and recommendations will be fed into the budget process. _
The Tax Justice Network has called for the introduction of a royalty on all offshore oil and gas projects, possibly of 10 per cent, which would raise between $4 billion and $6 billion over the next four years.
A Citi research note puts the figure at $US3 billion [$3.96 billion] over the next five years, if there was no grandfathering for legacy production.
_"The argument against, as presented by the Henry review, is that a volume or revenue-based tax is inefficient given it penalises all projects, and may prevent development of marginal projects," the note says. _
"Most oil and gas companies also flagged this risk of reduced future investment, which we also agree with."
_Professor Mintz, whose work involves comparing the tax burden for investment in different countries, said Australia's company tax rate should be reduced to 25 per cent. _
He calculates the tax burden on new investments in manufacturing and service industries in Australia to be 28.7 per cent, which includes company tax as well as other taxes, such as stamp duties.
This is more than nine percentage points above than the OECD average of 19.2 per cent.
While the marginal effective tax and royalty rate (METRR) for Australia's oil and gas sector is minus 35.5 per cent – that is, companies are "over-incentivised" for investing, Professor Mintz says – iron ore mining is heavily taxed at 37.8 per cent.
_That rate is second highest next to South Africa at 39.7 per cent, and more than seven other major iron-producing economies. _
"In our numbers Australia's tax treatment of oil and gas is the lowest effective rate [compared] with all the major countries including Canada," he said. "I do think there is value to reforming the PRRT, keeping in mind you have to be very careful with transition."