One risk faced by those who invest overseas, which I mentioned yesterday in "Beyond the Investing Risks," is resource nationalism.
Resource nationalism describes efforts by countries rich in oil or other valuable commodities to garner a larger share of the wealth represented by these assets for themselves, usually at the expense of those (e.g., foreigners) who invested time and money to help develop those interests in the first place.
More often than not, the moves come after commercial production has begun in earnest, prices have risen substantially, or economic pressures have spawned a hunt for additional government revenues -- or some combination of all three.
In the past, the phenomenon was more commonplace in developing nations and the world's wildest frontiers, where the notion of fairness and the rule of law was not something that could be taken for granted.
However, as I've argued here at When Giants Fall and in my book of the same name, widespread economic woes, competition for increasingly scarce resources, protectionist pressures, and heightened geopolitical instability will lead many governments to consider this option, in one form or another.
Already, one can get a taste of what's to come from the following report by the Sydney Morning Herald, entitled "Big Tax Looms for Mining Giants":
THE Henry tax review has recommended scrapping the state-based royalty taxes applying to mining projects and replacing them with a uniform national resource rent tax set to raise billions more.
The tax, most likely to be set at 40 per cent, would be modelled on the existing petroleum resource rent tax levied on petroleum products including crude oil and natural gas mined in Commonwealth waters other than the North-West Shelf and the jointly developed area between Australia and East Timor.
Treasury calculations suggest that if the PRRT formula had been applied to resources such as iron ore and coal and to companies including BHP Billiton and Woodside Petroleum over the past three years it would have raised an extra $14 billion.
In contrast to some state-based royalties, the resource rent tax would not be levied until all of the exploration and development costs associated with a project had been paid and would only be levied in those years when the project actually made a profit.
Treasury calculations show that had the system been in place in the early years of the last decade it would have raised less money than royalties because many mining projects were not making profits.
Australia's miners have been making record profits and margins in recent years. It is understood the Government felt they were paying a relatively low proportion of these profits in tax, especially in light of their heavy use of water and access to public infrastructure.
The Secretary to the Treasury, Ken Henry, yesterday defended special taxes on mining projects. He told the Australasian Tax Teachers Association that while company tax partly taxed ''profits extracted by foreigners from Australia's natural and immobile resource endowments'', Australia's special circumstances suggested the need for an additional tax.
''Many developed countries are either large economies, for which capital might not be so elastic in supply, or have few exploitable natural resources remaining,'' he said.
The proposed resource rent tax would itself be tax deductible for the purpose of calculating company tax.
Although it would be levied on a project by project basis, if it was like the petroleum tax it would allow companies to write off spending on new projects against profits from existing ones.
Making the case in an address to the Australian Minerals Council in September, a Treasury official, David Parker, said the community ''expects and should expect to receive a fair return from its natural resources''.
The final report of the Henry tax review was delivered to the Government last month.
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