WHEN the Federal Government starts talking about "resource rent", miners get scared.
Since leaks started appearing ahead of Sunday's announcement on the findings of the Henry tax review, some of the miners are very scared indeed.
Perhaps with good reason.
A Merril Lynch report this week says if speculation of a new 40 per cent resource rent tax is correct it could chop annual earnings of BHP Billiton by as much as 19 per cent, or about $US3.01 billion.
For Rio Tinto, the tax change could cut earnings by as much as 30 per cent, or almost $US3.0 billion, the report says.
The peak body for miners, the Minerals Council of Australia, has described a resource rent tax as a "tax grab" rather than a reform, while broking firm MF Global says investors should consider diversifying portfolios away from Australian miners.
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According to various leaks the Henry tax review, handed to the Federal Government in December, is recommending state-based royalties be scrapped and replaced by the new resource rent tax.
Such a move would simplify the current system, which is a confusing array of different royalty rates in different states, levied separately on different goods and at different times in the production chain.
A 40 per cent resources rent tax is not unprecedented in Australia, and already applies to most offshore petroleum operations.
But hold on, the states say, they have a constitutional right to levy royalties on resources inside their borders.
This view is backed by constitutional law expert Professor Michael Crommelin from the University of Melbourne.
"Unilaterally the Federal Government can impose a resource rent tax, but it can't unilaterally force the states to give up their royalties," Mr Crommelin says.
Already West Australian Premier Colin Barnett has warned he has no intention of killing the cash cow the royalties have been to his state.
Given the problems Prime Minister Kevin Rudd has faced trying to convince states to give up GST revenue to pay for his healthcare plan, one can only imagine the battle that may ensue over ending royalty schemes.
For this reason some have speculated the Government may instead choose to install a smaller tax on top of existing royalty schemes, something miners are sure to loathe.
Proponents of the tax change say it will better allow all Australians to share in the benefits of the resources boom.
They say a new system could take a slice of the "super profits" miners have been making on the back of the nation's natural endowments in recent years.
The new tax would probably apply to profits made by the miners, not on production, with exploration and development costs of a project able to be written off.
One argument says such a move would encourage junior miners, which can be deterred from new projects by the royalties they must pay once resources are extracted from the ground but before they are sold.
But some of the world's biggest resources companies are worried about the possible changes.
BHP Billiton, which in February posted a half-year profit of $US6.14 billion, is urging the Government not to alter the current system.
Rio Tinto Ltd says it is concerned by the speculation, and the head of a Chinese state-owned miner has warned any more taxes in Australia will "kill the goose that lays the golden eggs".
Professor Raymond da Silva Rosa from the University of Western Australia's business school says while mining companies may be making unprecedented profits now, the gravy train is not likely to last for an extended period.
"What happens if, as is common, commodities prices collapse and consequently resources tax revenue plummets as well?"
"Will the Government then jack up taxation in other sectors to make up the shortfall?" Professor da Silva Rosa asked.
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