Rio’s payment plan throws light on tax problem

Rio’s payment plan throws light on tax problem

The furore over Rio’s intention to double the time it takes to pay invoices settled last week when the company backed away from the plan.

But the incident has thrown fresh light on the over-taxed Western Australia market.

A policy paper commissioned by the Minerals Council of Australia, published in March, laid bare the challenges companies, specifically mining companies, are facing in regards to financial imposts.

It found that among 34 OECD countries, Australia has slid from having the 10th highest effective tax rate on new investments in the non-resources sector in 2005 to the 4th highest in Australia.

When it comes to the mining sector, miners are also more heavily taxed in Australia compared with major comparators. Mining royalties of between 2.7 and 7.5 per cent, when combined with other taxes such as the 30 per cent company tax rate, pushed Australia to the third-highest tax impact amid nine countries.

Reading Rio’s commentary, it seemed these and other costs were part of its motivation for the increased payment cycles. Last year both BHP Billiton and Rio Tinto increased its payment cycles; from 30 days to 60 days for BHP and 45 days for Rio Tinto. Last month Rio Tinto told suppliers it intended to increase that again to 90 days for contracts above $3 million and 60 days for contracts worth less.

Rio Tinto changed its mind last week on the back of intense supplier and political pressure. A spokesperson for Rio told The Australian the initial change to payment terms was intended to maintain jobs in a difficult commodities environment while in December last year outgoing chief executive Sam Walsh advocated for a lower company tax rate.

Guy Brandon, Tax Consulting Partner at HLB Mann Judd, said reduced costs remained the order of the day, especially for iron ore miners.

“With the iron ore price coming back from its high and the level of world supply on the increase, to be able to compete in this changed market place Australian iron ore producers need to have reduced costs of production.

“A reduction in company tax is one measure that may assist; with arguable higher costs of production, noting the generally higher labour costs in Australia already, any reduction in company tax would be welcomed,” Mr Brandon said.

The policy paper urged the Australian government to consider reducing the company tax rate to 25 per cent “as a minimum” and “even perhaps go further by pursuing the UK strategy of reducing the company tax rate by 20 per cent over time”.

Mr Brandon said that while there were many factors to consider, lower company tax could assist in payment cycles to suppliers.

“There are a number of mining services companies, having previously been profitable, struggling on the other side of the mining boom. With anecdotal evidence of margins being squeezed and invoices taking longer to be paid then any costs that are ‘dead’ money’ impacts on those companies,” Mr Brandon said.