Friday, August 17, 2012
Time to fix tax holidays
Batten commented that “average effective tax on PNG’s mining, oil and gas companies was now on the low side of fiscal regimes across the world”.
The IRC said the reasons for giving these companies tax concession over five to 10 years was to give time to them for construction and also because foreign investors needed that time to extract, produce, export and sell their products before generating a continuous income to pay tax.
Another factor that the IRC conveniently forgot was the fact that giving such companies a tax holiday is also giving the state itself a tax holiday because it is actively engaged as an equity partner in almost all major mining, oil and gas resource projects.
We tend to think the views held by the IRC are simplistic and overlooks certain important processes.
For one thing, most companies which choose to do business in the resource sectors are often publicly listed companies. These companies start making money from the day the executive government gives the go-ahead for a project.
A project licence is almost the same as a licence to make money. Once the announcement is made on major stock exchanges where major partners are listed, there is every likelihood that the share prices will respond positively in direct reaction to the news.
A project might cost tens of millions of kina to put together but the money is not made after construction when the first shipment is made.
The money is made right from day one through stocks trading. Unfortunately, the state does not make any such money even if it is an investment partner because it is not a listed company. It must wait until the project cost is paid off and the loans are repaid before it sees any return on its investment.
The only way to start earning any money from a project right from the start is through taxation. If that is foregone, then it just continues to tax its poor citizens through income tax and lets the rich corporate giant off for the most important first 10 years when the richest veins of gold or copper are mined or oil and gas are pumped out.
Commodity prices change all the time. The prices might be highest during the tax holiday period and then slump to uneconomical lows when companies are due to pay taxes. It is very difficult to predict pricing movements over a long period such as the periods offered as tax holidays.
Companies structure themselves to benefit from many situations. They form themselves into licence holding entities or as contracting entities, as financing entities, asset holding entities and mineral/energy sales entities.
They do this to maximise their incomes no matter what part of the world they are operating in and what taxation regime they operate under.
They do not come in blind but, of course, they will tell the government a project is uneconomical unless certain concessions can be offered by government, principle among them, tax holidays.
Of course they rant and rave about the taxation and about how PNG is only one of many sources and that it must do something to attract the investment dollar or it will overfly it and go off elsewhere. Of course they won’t move. The world is exploding with demand for raw materials such as PNG has. They will keep coming, if not today then certainly tomorrow. PNG must learn to stand its ground and set the terms for exploitation of its non-renewable resources. Tax holidays are a dead giveaway and ought to be done away with.
The state, of course, as a partner, is trapped in to acting on behalf of its business partners and often against the interests of its people and their welfare.
The end result is that our government misses out on the revenues that foreign investors earn as a result of the way these investors have structured their operations so as to maximise the benefits while making us believe that they will need tax holiday period because they are outlaying so much money in the millions for the purchases of construction equipment and the actual equipment for the operations.