Market reactions to the proposed resources rent tax

Philip Brown

University of New South Wales – Australian School of Business;

University of Western Australia – UWA Business School;

Victoria Clout*

University of New South Wales – Australian School of Business

Andrew Ferguson

University of Technology Sydney – School of Accounting

This version: 21 August 2013 We acknowledge the financial assistance provided by the AFAANZ research grant awarded in 2010. The authors offer thanks for comments from the participants of AFAANZ 2011 Darwin conference, ANU and Uni of Melbourne seminar series 2011. * Corresponding author: Victoria Clout, University of New South Wales, Australian School of Business, School of Accounting, UNSW, Sydney 2052, Tel: +61 2 9385 6957, Email: v.clout@unsw.edu.au

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Market reactions to the proposed resources rent tax Abstract We investigate share market reactions to the proposed introduction in Australia of the

Resources Super Profits Tax (RSPT). The RSPT was one of the 138 recommendations of

the Henry Taxation Review released on 2 May 2010 and was chosen as the centrepiece of

the Australian government’s response to the review. The announcement of the RSPT

took the mining industry by surprise and can be interpreted as a relatively noise free

exogenous taxation shock. The proposed RSPT was to affect only the domestic

operations of Australian resource companies. We investigate the market reactions to the

initial announcement of the proposed RSPT and subsequent RSPT policy-related

announcements.

Key words: resource super profits tax, event study, extractive industries

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Market reactions to the proposed resources rent tax

1. Introduction There have been few tax reform issues that have created as much controversy, lobbying

activity and international speculation as the proposed Resources Super Profits Tax

(RSPT).1 Australia’s mining industry is a significant contributor to exports (80% of

commodities exports and 56% of total exports of goods and services in 2008-09).

Remaining competitive internationally is an essential factor to the resources industry and

much of the reaction of resources company executives in the media to the RSPT has

highlighted the tax will have compromising effects on their competiveness.

The Henry Taxation Review (HTR) was started in 2008. On 2 May 2010 the Federal

government publically released the consequences of the Review. One of the 138

recommendations was a proposal to introduce the RSPT, with the Treasurer Wayne

Swan announcing on 3 May that the RSPT would be the centrepiece of the government’s

response to the Henry Taxation Review. The RSPT was to apply to all Australian

resources and petroleum companies’ domestic operations. The threshold for the 40% tax

was for a company’s extraction profit in excess of the 10-year government bond rate (at

2010 this was just over 5%). Onshore oil projects were to be subject to the tax. Tax

under the new tax regime would be payable based on the realised value of resource

deposits. The cost of extracting resources would be allowed as deductions. Projects in

existence at the time of adopting the RSPT would be taxable under its regime. Royalties

collected on projects would be kept by the States and Territories and continue to be paid

by resources firms. The federal government would refund companies with credits for

royalties paid. Provision was made for a resource exploration rebate to provide an offset

1 In fact the announcement of the RSPT arguably brought about the collapse of Kevin Rudd’s Prime Ministership (see Shanahan and Franklin, 2010).

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to tax at the company rate. Part of the proceeds from the RSPT would be used to create

a $6 billion regional infrastructure fund and from the fund Western Australia and

Queensland would be allocated more than $2 billion each. The tax rate applicable to all

companies would be cut over the two financial years following the 2012 adoption, from

30% to 29% in 2013/14 and down to 28% in 2014/15. A tax rate of 28% would be

extended to all eligible small businesses starting from the 2013/14 financial year.

The release of the HTR and corresponding announcement of the RSPT was a shock to

the mining industry. Anecdotal reports suggested approximately $9 billion was wiped off

the market value of Australian resources companies in the aftermath of the RSPT

announcement.2 In the days following, resources companies announced the suspension

or deferral of development projects owing to the potential impact of the RSPT.3 Other

companies made specific announcements suggesting their off-shore projects would not

be subject to the RSPT.4 Leading industry figures expressed vocal opposition to RSPT

given its threat to future project development, employment and economic growth.5

This study adopts an event study approach pioneered by Ball and Brown (1968) to

consider the wealth effects associated with the announcement of the RSPT.

2. Related literature

2 See Burrell (2010). 3 See Thomson (2010). 4 See Dragon Mining Limited announcement to the ASX entitled ‘NO EXPOSURE TO PROPOSED RESOURCE SUPER PROFITS TAX’ on 5th May, 2010. 5 Some examples include Ross Palmer’s comments suggesting ‘Communist China will have a far better tax system for resources than Australia’ The Morning Bulletin (2010). A further example is Marius Klopper’s assertions that; “The stability and competitiveness of the tax system have been central to the investment in resources in Australia. If implemented these proposals seriously threaten Australia’s competitiveness, jeopardise future investments and will adversely impact the future wealth and standard of living of all Australians” (Phaceas, 2010).

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In a recent review paper of the empirical taxation literature, Hanlon and Heitzman (2010)

suggest;

As we write, the US is (and other nations) potentially approaching a major crossroads in tax

policy. As administrations propose changes to the tax rules, tax researchers in accounting should

not sit on the sidelines. They should position their research and inquiry in a manner than can

inform debates and inject much needed data with regard to firm behaviour, real effects, and, to

the extent possible, macroeconomic implications.

We respond to Hanlon and Heiztman’s (2010) call to inform policy debate by

investigating market reactions to the announcement of the RSPT by the Rudd Labour

Government on 2nd May 2010. We contribute to the tax literature in a number of

important ways. First, we extend prior industry level taxation studies which have mainly

focussed on regulated industries in the US. Regulated industries are argued to be good

settings for tax studies as disclosure is typically higher. For example a number of studies

have investigated the US banking industry and portfolio management activities as a

means of managing tax liabilities (Sholes, Wilson and Wolfson, 1990; Collins,

Shackelford and Wahlen, 1995; Beatty, Chamberlain and Magliolo, 1995; Collins, Geisler

and Shackleford, 1997). By and large these studies report mixed results on the

relationship between taxes and bank portfolio management. We broaden the tax

literature’s industry level analysis by examining taxation issues in the extractive industries.

Secondly, we contribute to the taxation and asset pricing literature by applying the event

study approach to an exogenous taxation shock applying the event study approach. Prior

capital market studies have incorporated tax considerations in the mergers and

acquisition area. For example Hayn (1989) examines market reactions around

acquisitions of freestanding corporations. Hayn finds that target and bidder

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announcement returns are driven by tax attributes of the target. An extensive literature

examines the impact of capital gains taxes on equity pricing. Reece (1998) finds increased

trading volume and lower stock prices for winners after IPO investors qualify for capital

gains relief. Poterba and Weisbenner (2001) examine the January effect and find that

stocks declining during the capital gains tax holding period tend to rebound early in the

next year, consistent with year-end tax loss selling. A recent Australian study Brown,

Ferguson and Sherry (2010) investigates tax loss selling and finds significant volume

effects prior to the 30 June end to the tax year and more sell-orders in June among loser

stocks, followed by a rebound in July. Brown et al. also find some evidence of increased

tax loss selling among small mining stocks. Our study is the first asset pricing related

study of an exogenous tax shock specific to an industry.

Third, we contribute to the multijurisdictional tax related research. Collins and

Shackelford (1992) examine tax planning behaviour of US multinational firms following

the 1986 downward adjustment to US corporate tax rates. We incorporate a novel

control for the geographical focus of mining companies. The RSPT provided clear

guidelines to investors. Mining companies with deposits in Australia would be subject to

the RSPT, while Australian mining companies with off-shore operations would

effectively be tax exempt.

Last, it is worth noting that the extractive industries in Australia is an ideal location for

empirical analysis owing to the large number of listed resources companies. Schwert

(1981) notes that many regulation studies in the US utilizing stock price data are

constrained by small sample size. To illustrate, the effects of a small sample are evident in

a number of US studies employing stock price data to examine regulation of the

electricity industry. Stigler and Friedland (1962) studied the impact of price regulation on

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state electricity supply in the US between 1907 and 1920. Their sample was restricted to

20 electricity suppliers. Clarke (1980) examined the use of the Fuel Adjustment Clause

(FAC) for electricity utilities exposed to high variation in energy input costs. The FAC

allowed energy suppliers to alter the prices charged to consumers with greater frequency

to mitigate the effect of fuel input price deviations. Clarke studied 18 coal-dependent

utilities, 12 oil and gas-dependent utilities and 9 hybrid fuel-source utilities, for a total

sample of 39 companies. An added benefit of a study of the Australian mining industry is

its homogeneity and the presence of what are commonly believed to be substantial

regulatory costs.

We also build on a some of prior studies on regulatory issues in the extractive industries.

Gerwig (1962) considered the impact of a US supreme court decision (the so-called

Philips decision) in June 1954 modifying The Natural Gas Act of 1938, which extended

federal regulation over gas producers whose gas was sold interstate. Gerwig estimated

cost of the regulation was 7% of the base price for natural gas. He did not utilize capital

markets based tests as such.

Other industry specific research examines the effect of proposed changes to accounting

standards, applying event study methods. Collins and Dent (1979) examine returns

associated with the proposed elimination of the ‘full cost’ accounting choice for oil and

gas production companies after the release of the FASB Exposure Draft on 15 July 1977.

In summary, the FASB sought to stop the full cost approach whereby companies are able

to capitalize all expenditure on oil and gas exploration. In contrast, under the successful

efforts method favoured by the FASB only costs known to have contributed to discovery

may be capitalized. Collins and Dent identify a significant negative difference between

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the performance of full cost and successful efforts firms that was sustained over an 8

month period subsequent to the issue of the exposure draft. Lev (1979) finds that firms

adopting the ‘full cost’ method saw falls of around 4.5% using a narrower three day event

window after the release of the FASB Exposure Draft. However, Dyckman and Smith

(1979) examine the same event and report inconclusive results.

The use of the event study methodology to examine market reactions to accounting

choice deliberations by the FASB was developed by Noreen and Sepe (1981). They

examine a series of sequential events relating to inflation adjusted accounting, including

the initial proposal mandating disclosure, the postponement of a decision and the

announcement of a second Exposure Draft. The selection of events was justified on the

basis that the authors judged that these events would exhibit the largest market reactions.

Noreen and Sepe (1981) find that stock returns were affected by each of the FASB’s

deliberations. They conclude that their methodology would be useful in other settings

where policy makers were vacillating over time. Given the RSPT was announced in May,

2010 and that an agreed solution has yet to be negotiated, the handling of the RSPT

implementation is a good example of government vacillation over an extended period of

time.

Smith, Bradley and Jarrell (1986) adopt the event study methodology to examine market

reactions to the oil crisis following Organization of the Petroleum Exporting Countries’

(OPEC’s) actions on 16 October 1973 to increase the ‘posted price’ of oil from $3.00 to

$5.11 per barrel. The posted price was used to calculate royalties paid by foreign oil

producers, so an increase constituted a tax on multinational oil firms. Shortly afterwards,

OPEC increased their posted price again, from $5.11 to $11.65 per barrel. The US

Congress responded quickly to OPEC by imposing oil price regulation that November.

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In brief, price caps were introduced on certain types of crude oil production and refinery

products. The capped domestic oil production was then allocated to US refiners under a

program referred to as the Crude Oil Allocation Program, or CARP. Smith et al. examine

the wealth effects for various industry participants – domestic producers, domestic

refiners, integrated US producers and refiners, and foreign oil companies – as a result of

the OPEC price increases and the US response.

In terms of US domestic oil producers, some production properties were exempt from

the price cap, suggesting they would generate the same type of gain from a price increase

as would be conferred by an unregulated market. For price controlled properties, the

market value of the gain (per barrel) was defined as the difference between the market

price of oil before OPEC posted their price increases and the capped price under CARP.

For US oil refiners, their benefit was defined as the income transfer equal to the

difference between the prices of controlled and uncontrolled oil for every barrel received

under CARP, less any effect of price reductions resulting from capping of refined

products. This assumed the refiners’ price reductions were binding. Clearly, foreign oil

producers were the worse off under the OPEC changes since they incurred higher

production royalties.

Smith et al. obtained a sample of 7 domestic crude producers, 21 integrated refiners, 5

US integrated refiners with substantial foreign activity and 4 foreign integrated refiners, a

total sample size of 37. Examination of monthly cumulative abnormal returns around

these events demonstrated that, consistent with predictions, the foreign integrated

refiners were the biggest losers. In contrast, US oil producers and US integrated firms

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were big winners. Cross-sectional abnormal returns obtained using a standard market

model approach were regressed on firm operating characteristics including foreign oil

reserves, domestic exempted oil reserves, domestic regulated oil reserves, foreign refining

capacity, domestic refining capacity and rights to price-controlled crude under CARP.

Coefficient estimates indicated that the market value of an oil firm increased by around

$12 for every barrel of domestic oil production, while both US and foreign refining

capacity suffered a capital loss of about $4 per barrel. Each barrel received under CARP

was estimated to be worth between $9 and $12 depending on the specification of the

regression model. The cross-sectional model explained around two-thirds of the variance

in returns.

Smith et al.’s findings however were limited by several factors. First, oil reserves were not

systematically reported by US companies, so oil production rates were used to infer

reserves. Second, reported production rates do not allow a breakdown between foreign

and domestic production. Consequently the researchers could not accurately classify

foreign oil producers as OPEC producers, who were subject to the OPEC tax, or non-

OPEC producers, who were not. Third, information on each firm’s CARP allocation was

not available to November 1974. The 1973 production rate was used to proxy for the oil

entitlement, but it is a noisy measure. Last, Smith et al.’s event study results are coarse in

that they utilized monthly stock price data and a relatively small sample of stocks.

The Smith et al. study bears similarities to this study in that we also distinguish between

domestic and foreign operations focus. Like Smith et al. we expect differing event

returns behaviour, in our case to the announcement of the proposed RSPT. The RSPT is

applicable to domestic mineral production, whilst profits generated from foreign

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operations are effectively exempt from the RSPT. Accordingly, we propose H1 as

follows:

H1 The greater the mining company’s operational focus on Australia, the larger the negative market

reaction to the RSPT announcement.

There is anecdotal support suggesting that large mining firms were comparatively better

off in terms of wealth effects following the announcement of the RSPT6. The inclusion

within the RSPT regime of small businesses (such as allowed asset write offs) supports

the implication that small businesses required more protection than large companies.

Regulation has been shown to benefit large firms. Neumann and Nelson (1982)

undertake a study of the impact of safety regulation on firm size following the

implementation of the Coal Mine Health and Safety Act of 1969. They find that

competition was reduced following the implementation of the Act, with small firms

exiting the coal industry.

In a later study, Pashigian (1984) considers the effects of environmental regulation on

plant size by examining the influence of the 1970 Clean Air Act in the US for a sample of

manufacturing companies. The Clean Air Act encapsulated government attempts to

improve air and then water quality by establishing minimum standards. Pashigian focuses

on the effects of the environmental regulation on the size of plants since it is the

manufacturing plant (not the company) that is the object of regulation. The observation

6 See “Tax deal not embraced by all stakeholders”, ABC News, Inside Business, 4th July 2010 (http://www.abc.net.au/insidebusiness/content/2010/s2944168.htm).

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is made that plant size is positively correlated with in firm size; consequential Pashigian

finds that small companies are comparatively worse off under the Act.

More recently, Bartel and Thomas (1987) find evidence of predation through regulation

in their study of the Occupational Safety and Health Administration and the

Environmental Protection Agency. Bartel and Thomas find that larger unionised

companies benefit at the expense of small firms. Thomas (1990) investigates the effects

of the U.S. Food and Drug Administration (FDA). Small firms are shown to suffer

significant reductions in research productivity as a result of FDA regulations. The

findings of these prior studies suggest larger mining firms may be relatively better off

under the RSPT vis à vis small mining companies. An alternative view is that under the

RSPT, small exploration companies would be eligible for a Resources Exploration

Rebate under the RSPT, which would allow exploration expenditure for minerals,

petroleum or quarry minerals to be immediately deducted. In addition, for companies

with no taxable income, these deductions would add to losses that would be carried

forward and offset against future income. On balance however, we favour the

interpretation that smaller mining companies were comparatively worse off under the

RSPT. This gives rise to H2 as follows:

H2 Larger firms experienced less negative returns than small firms following the announcement of the

RSPT.

On the 2nd July, 2010 the Federal Government announced that due to industry concerns

it has scrapped the proposed RSPT and would replace it with a Minerals Resource Rent

Tax (MRRT). The MRRT was to take effect from 1 July 2012. A crucial feature of the

revised MRRT is that it would be confined to iron ore and coal production. This suggests

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that bulk commodities producers were the real targets of the original RSPT proposal and

thus would have experienced larger negative returns vis a vis base and precious metals

participants. This assertion is supported by a Morgan Stanley research report suggesting

iron ore and coal companies would be worst of under the RSPT with 28 and 21%

earnings declines respectively. This compares with base metals earnings decline of 17%

with a 9% reduction predicted for gold companies.7 This is examined in H3;

H3 Bulk commodities (iron ore and coal) participants were worse off than base and precious metals

participants under the initial RSPT.

We empirically test at least two supplementary RSPT related events. The first is the

sacking of Kevin Rudd as Prime Minister which occurred on the 24th June, 2010. This

would likely precipitate a revision in the minds of investors the probability of the RSPT

proceeding given his demise was closely linked to the botched announcement of the

proposed RSPT. A second event is the announcement of a compromise deal with the

mining industry hatched by Kevin Rudd’s replacement, Julia Gillard. This occurred on

the 2nd of July, 2010. On this date the Federal Government announced due to industry

concerns it has scrapped the RSPT and proposed to replace it with a Minerals Resource

Rent Tax (MRRT) to take effect from 1 July 2012. (Several newspapers including Fin

Review run comparisons of the RSPT vs MRRT). The MRRT tax is 30%, down from the

40% RSPT, and is confined to iron ore and coal production only. Each of the

subsequent events can be interpreted as good news for the mining industry, so we expect

a positive announcement date effect.

3. Data

7 FN Arena, 21st May, 2010

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Daily Australian firm share price data was obtained from Datastream and was used to

compute returns. For each firm the GICS sector and industry codes, daily market

capitalization and accumulated losses (tax shield) were obtained from Aspect DatAnalysis.

Data on the operational focus and resource focus for hypotheses 1 and 3, respectively,

were obtained from the resources firm’s 2009 annual reports. This study uses 2009

annual reports as all are currently available. For the estimation of abnormal returns data

on the All Ordinaries index was obtained from SIRCA’s Core Research Database.

Event dates examined in this study were obtained through media searches and analysis of

press coverage. Table 1 contains the dates of the events and summary of the nature of

the event. As per Noreen and Sepe (1981) each event has been coded with a directional

prediction of the likelihood of adoption of the RSPT or mining rent tax. The plus sign

indicates the event is shows the adoption is more likely, the minus sign indicates less

likely and events where there is little to guide prediction of impact are indicated with an

asterisk.

[INSERT TABLE 1 HERE]

4. Research design and empirical results

To estimate abnormal returns for firm i over the event windows (i,t) the following

formula was estimated:

ARi,t Pi,t Pi,t 1

Pi,t 1

Raoi ,t Raoi,t1

Raoi,t1

(1)

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where ARi,t is the abnormal return of firm i at time t, Pi,t is the share price of firm i at

time t, Pi,t1is the share price of firm i at time t-1, Raoi ,t is the level of the All Ordinaries

Index at time t, and Raoi ,t1 is the level of the All Ordinaries Index at time t-1. This study

uses a three-day window (day -1, 0, +1) to capture a relevant impact of the event.

Abnormal returns are then summarised over the event windows (p,q) by CAR

calculations are follows:

CARi ,t (p,q) ARi ,tt p

q

(2)

The model for estimating the hypotheses is as follows:

CARi,t 0 1AUSDEPi,t 2SIZEi,t 3BULKCMMi,t 4ENGYi,t 5SHIELDi,t i (3)

Where AUSDEPit is a proxy for the firm’s exposure to Australian interests, SIZEit is firm

size as measured by daily market capitalisation, BULKCMMit is a proxy for the firm’s

exposure to bulk commodities (iron ore and coal) and ENGYit takes a value of one if the

firm’s GICS industry code is Energy and zero otherwise, and is the firm’s tax shield for

the financial year of the event. An additional control included in the model is SHIELDit

accumulated tax losses8 as a measure of the firm’s tax shield.

8 At least one company made reference to accumulated losses in their RSPT related announcement. See Dragon Mining Limited ASX announcement entitled ‘NO EXPOSURE TO PROPOSED RESOURCE SUPER PROFITS TAX’ on 5th May, 2010.

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To estimate AUSDEPit a text search of conducted of firms’ 2009 annual reports. A score

of one was given for each mention of Australian location (e.g. Sydney, Perth, Western

Australia, etc) and then a score for each mention of a foreign location (e.g. China,

Shanghai, Hong Kong, London, UK, etc). The measure is equal to the Australian total

score divided by the sum of the Australian and Foreign scores. This acts as a scale on the

total size of operations. Descriptive statistics are presented in Table 2. Future testing

could involve an investigation of exposure to Western Australian and Queensland

interests compared to other Australian states.

[INSERT TABLE 2 HERE]

BULKCMMit required a text search for commodity names of firms’ 2009 annual reports

with a score of one being given for each mention of a particular commodity. The variable

was estimated as the sum of iron ore and coal scores (plus variants of these two

commodities, e.g. hematite, iron, magnetite, etc) divided by the sum of all commodities

mentioned in the annual report. This gives an estimation of a firm’s exposure to these

two bulk commodities. Table 2 reports descriptive statistics of this variable.

Extension to the testing in this paper includes an analysis of Project Milestone with the

use of models testing separately for explorers and developers. The intuition is that

explorers are developers would be potentially have experienced a different share price

reaction to the RSPT as there would be taxes payable for developers (i.e. those with

production) compared to the explorers that would potentially benefit from the

deductions allowed under the RSPT regime. The status of a firm as developer would be

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based the value of firms’ reported resource value exceeding a certain threshold with firms

less than this level would be classified as explorers.

The initially daily firm share prices were obtained between May 2008 and Oct 2010 for

1,806 Australian firms, across all industries, from Datastream. Share prices were

unavailable for calculation of the cumulative abnormal returns (CARs) of 186 firms and

these firms were removed from the sample. GICS sector information for each firm was

obtained from Aspect Dat Analysis and 53 firms that could not be matched GICS sectors

were eliminated. Primary analysis requires a sample composed of only materials and

energy firms. A total of 831 firms were eliminated as their GICS sector was neither

materials nor energy sectors, this gave a sample of 737 firms. Data was unavailable for 85

firms to estimate AUSDEPit, after these firms were removed an additional 40 firms were

eliminated as the data for estimating BULKCMMit was unavailable and this removal

resulted in a final sample size of 612 firms.

4.1 Descriptive Statistics

The mean of the CARs for the events are predominately small and the majority are

positive (see Table 2). The CARs tend to be positively skewed. AUDEPit is positive for

all firms and the mean and median suggest a greater than 50% exposure to Australian

interests. The mean of BULKCMMit is low and positively skewed. SHIELDit is positive

for the mean while relatively large negative values exist. SIZEit mean measured as at event

III is considerably smaller the mean of SIZEit measured for the other events. The

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standard deviation for SIZEit measured for the events is large indicating the diversity of

materials and energy sector firms within the sample (e.g. small explorers and large

developers/producers).

4.2 Regression Analysis

The model explaining CAR was estimated for each of the events I to XII using a cross-

sectional approach. The results are reported in Table 3.

[INSERT TABLE 3 HERE]

Event I’s CAR is negatively and significantly related to SIZEit while positively related to

BULKCMMit. This suggests that the proposal of the new tax is anticipated to be

impacting on firms differently based on size. This stage of the proposed Henry Review

there is little information about whether bulk commodity firms, such as iron ore and coal

firms, are going to be specifically or differentially treated to other firms within the Henry

Review recommendations, therefore the BULKCMMit positive relation to CAR is

unexpected.

For Event III only ENGYit is significantly related to CAR, with the relation being

positive. This event is also attempting to capture any leakage of information as no official

release of information was made on this date, simply the handing over of the Henry

Review to the Treasurer. It could this positive association between ENGYit and CAR is

the result of leaked (or speculative) information that is suggesting a favourable tax regime

to energy sector firms rather than materials sector firms.

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For Event IV BULKCMMit is negative and significantly related to CAR. This event is a

release of information by the Treasurer to attempt to reduce speculation about a large

increase in mining royalties in the media. The speculation of a large increase in mining

royalties would particularly be detrimental to bulk commodity firms as royalties are paid

per tonne. The bulk commodity firms have the higher tonnage than other commodities.

The negative relation could add evidence suggests that in particular bulk commodity

firms were seen as being the targets of the new resources tax as they are generally

profitable firms in the producer phase. This finding supports hypothesis 3 that bulk

commodity firms are considered to be worse off under the RSPT.

Event VII has ENGYit as positive and significantly related to CAR. This event is the

negotiation between the then PM Kevin Rudd and senior mining executives. This result

is unexpected, but could be explained by speculation that talks between the government

and industry, just after the releases of much negative news by energy and mining

companies, could lead to a compromise that is favourable towards energy companies.

Event VIII has both AUSDEPit and ENGYit as significantly related to CAR. In the case

of AUDEPit the relation is positive and for ENGY negative. The event is a release of

information from the government’s Mining tax consultation panel to scrap the 40% tax

refund for failed projects. The positive relation between CAR and AUSDEPit is

consistent with media reports suggesting that the refund-ability was not valued by mining

firms. Firm’s Australian interest only would have been eligible for the refund on failed

projects. The negative relation between CAR and ENGYit could suggest that for value

for energy sector firms from this refund were predicted and with the scrapping this value

has been lost.

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SIZE is positively and significantly related to CAR for Event XII. This event is the

meeting of the Federal government’s Mining tax panel in Perth to discuss the MRRT, the

replacement for the RSPT. This positive relation could suggest that larger firms would be

better off than smaller firms under the proposed MRRT.

5. Conclusion

This study investigated the market reactions to the proposed introduction of the

Resources Super Profits Tax (RSPT) one of the recommendation of the Henry Taxation

Review. There is support in this study for the market predicting the MRRT will be more

detrimental to small firms than large firms. There is support based on the evidence that

bulk commodity firms such as iron ore and coal firms experienced negative cumulative

abnormal returns (CARs) in the face of an impending tax reform, i.e. a reform that may

target the profitable producers within the materials and energy sectors.

References

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The Morning Bulletin. 2010. Palmer slams RSPT. The Morning Bulletin, 5 May 2010.

21

Table 1 Resources rent tax events

Event Date of Event Event Source

Assumed effect on

probability of RSPT or

mining rent tax being

implemented I 13 May 2008 Treasurer Wayne Swan announces Australia’s

Future Tax System Review is to be chaired by Ken Henry.

Australians Future Tax System (AFTS) website

+

II 6 Aug First discussion paper released – “Architecture of Australia’s tax and transfer system” – document contains a section on taxing resource assets – examples include other countries systems such as Norway, Canada and Russia

AFTS website

+

III 23 Dec 2009 The Review Panel delivered its final report to the Treasurer (contents kept under wraps – opposition calls for sharing of the report made on this date)

AFTS website

*

IV 22 Jan 2010 Treasurer announces that the government will reveal a report recommending a tax overhaul in response to newspaper reports that the plans included a large increase in mining royalties. (Other sources report a sell-off of resources stocks in response to the potential new mining tax.)

Reuters News

+

V 27 Jan PM Kevin Rudd states that there is no decision yet which recommendations to adopt

Reuters News -

VI 2 May The Federal Government officially releases the Henry Report and its responses – “Final Report” document issued on the internet

AFTS website

+

Henry tax Review recommends the introduction of a 40% Resource Super Profits tax (RSPT) on profits earned from resources rather than production by July 1, 2012. (The Platts Commodity News suggests this release is amidst much criticism.)

The Australian

3 May Treasurer Wayne Swan announces that the RSPT will be the centre-piece of the government’s response to the Henry Review

ABC Radio

+

Reports that at least $9 billion was wiped off the market value of the nation’s resources companies amid investor fears of a severe downturn in earnings sparked by Kevin Rudd’s planned 40 per cent super tax on profits. Many papers suggest projects will be cancelled and/or overseas projects will be undertaken instead. Companies start to announce their projects will be threatened by the RSPT. The first company to report is Origin Energy on this date. Multiple other companies make similar announcements.

The Australian (many other papers run the same story)

22

Table 1 continued

Event Date of Event

Event Source

Assumed effect on probability of RSPT or mining rent tax being implemented

VII 4 May Reports that on the evening of this day PM Kevin Rudd was locked in talks with the nation's most senior mining executives as the mining industry ratcheted up their campaign against the super profits mining tax.

The Australian

-

Canada’s Finance Minister Mr Jim Flaherty commented to the media that Australia’s proposed RSPT could be a huge competitive advantage for Canada and that as Canada’s environment of favourable (and declining corporate tax environment) was a “great attraction for investment”.

PerthNow Business News Online and Australian Mining Online

*

VIII 24 May Reports that the government’s Mining tax consultation panel will recommend the government to reconsider a key selling point of the RSPT – the 40% tax refund for failed projects – considered by mining companies to be of little value

The Australian

+

IX 24 Jun Kevin Rudd steps down as party leader and PM. The Sydney Morning Herald

*

X 2 Jul Federal government announces due to industry concerns it has scrapped the RSPT and proposes to replace it with a Minerals Resource Rent Tax (MRRT) to take effect from 1 July 2012. (Several newspapers including Fin Review run comparisons of the RSPT vs MRRT). The MRRT tax is 30%, down from the 40% RSPT, and is confined to iron ore and coal.

The Sydney Morning Herald

+

XI 11 Sept Independent Andrew Wilkie reports to the press of his threat to block the RSPT unless it is re-designed

The Australian -

XII 7 Oct to 8 Oct

Federal government’s mining tax panel has first meetings in Perth discussing the MRRT that has replaced the super profits tax

The Australian +

23

Table 2

Descriptive Statistics

Panel A - Australian materials and energy sample CARs

Mean Median Standard Deviation Minimum Maximum Skewness

CAR_I 0.01 0.00 0.12 -0.50 1.00 2.17

CAR_II -0.02 0.00 0.09 -0.95 0.52 -2.25

CAR_III 0.00 0.00 0.07 -0.53 0.41 -0.42

CAR_IV -0.01 0.00 0.05 -0.51 0.18 -2.46

CAR_V -0.02 0.00 0.15 -1.08 2.20 4.48

CAR_VI 0.01 0.00 0.08 -1.13 0.73 -1.59

CAR_VII 0.02 0.00 0.07 -0.20 0.83 5.71

CAR_VIII -0.01 0.00 0.07 -0.48 0.46 0.24

CAR_IX 0.01 0.00 0.11 -0.69 1.92 8.44

CAR_XI 0.01 0.00 0.12 -0.52 1.30 4.40

CAR_XII 0.01 0.00 0.10 -0.52 0.94 2.80

Where CAR is the cumulative abnormal returns estimated for a three day event window (-1, 0, +1) and the

event to which the CAR relates is indicated as a Roman numeral (see Table 1 for event descriptions).

24

Panel B – Materials and Energy companies independent variables

Mean Median Standard Deviation Minimum Maximum Skewness

AUSDEP 0.58 0.60 0.24 0.06 1.00 -0.17

BULKCMM 0.20 0.07 0.35 0.00 2.21 2.77

SHIELD 0.13 0.00 1.40 -4.80 27.06 15.28

SIZE_I 5.57 0.20 36.02 0.01 660.10 13.36

SIZE_II 4.77 0.17 29.95 0.00 522.60 12.27

SIZE_III 2.59 0.07 16.02 0.00 224.65 9.58

SIZE_IV 5.60 0.32 28.40 0.00 378.15 9.59

SIZE_V 4.45 0.24 25.69 0.00 424.18 11.59

SIZE_VI 4.49 0.24 25.68 0.00 406.94 11.58

SIZE_VII 4.49 0.24 25.68 0.00 406.94 11.58

SIZE_VIII 4.24 0.22 24.46 0.00 389.28 11.62

SIZE_IX 4.23 0.20 24.54 0.00 396.26 11.53

SIZE_XI 4.80 0.24 27.03 0.00 450.57 11.62

SIZE_XII 5.35 0.27 30.60 0.00 482.67 11.15

Where AUDEP is a proxy for a firm’s exposure to Australian interests, BULKCMM is a proxy for a firm’s

exposure to iron ore and coal (bulk commodities), SHEILD is the firm’s tax shield (scaled by $10 million),

and SIZE is daily market capitalization (scaled by $10 million) and the event to which the SIZE estimate

relates is indicated as a Roman numeral (see Table 1 for event descriptions).

1

Table 3

Ordinary least squares regression of cumulative abnormal returns for the Australian materials and energy sample

EVENT I II III IV V VI

Intercept -0.0067 0.6366 -0.0056 0.6117 0.0074 0.3821 -0.0089 0.1191 -0.0011 0.9506 0.0159 0.1092

AUSDEP 0.0089 0.6726 -0.0187 0.2556 -0.0188 0.1362 0.0130 0.1230 -0.0109 0.6835 -0.0205 0.1634

SIZE -0.0002 0.0779 0.0001 0.2734 -0.0001 0.6974 0.0000 0.4964 0.0004 0.1325 0.0001 0.6878

BULKCMM 0.0277 0.0550 -0.0124 0.1294 0.0059 0.4953 -0.0192 0.0010 -0.0256 0.1644 0.0119 0.2389

ENGY 0.0183 0.1066 -0.0135 0.3400 0.0134 0.0508 -0.0064 0.1591 -0.0226 0.1198 0.0109 0.1718

N 612 612 612 612 612 612

Adj R2 0.0128 0.0011 0.0051 0.0171 0.0025 0.0031

EVENT VII VIII IX XI XII

Intercept 0.0145 0.0735 -0.0154 0.0425 0.0027 0.8375 0.0090 0.5139 0.0030 0.2710

AUSDEP -0.0048 0.6915 0.0272 0.0157 0.0239 0.2285 0.0125 0.5385 0.0081 0.4890

SIZE 0.0000 0.8342 -0.0001 0.5503 0.0000 0.8454 0.0000 0.8810 0.0000 0.0987

BULKCMM 0.0105 0.2004 -0.0029 0.7071 -0.0103 0.4499 -0.0017 0.9059 0.0249 2.2000

ENGY 0.0116 0.0749 -0.0184 0.0026 -0.0065 0.5444 -0.0069 0.5315 -0.0045 -0.5010

N 612 612 612 612 612

Adj R2 0.0011 0.0231 0.0043 0.0016 0.0032

2