Q+A-Will Australia's mining tax be watered down?

(For complete coverage of the tax [ID:nAUTAX])

By James Regan

SYDNEY May 27 (Reuters) - Australia's government may be considering changes to its controversial new mining tax, which critics argue will hit economic growth and supporters say will ensure miners pay a fair price for limited national resources.

Treasurer Wayne Swan, after weeks of public and private debate, has so far said he will proceed with the original "tax framework" to take effect in 2012, but details of the tax are subject to negotiation and could be tweaked.

* WHAT'S CHANGED SINCE THE MAY UNVEILING OF THE TAX?

Prime Minister Kevin Rudd has said the 40 percent tax rate is set in stone and will not give ground here for fear of damaging his authority in the lead-up to elections later this year. But The Australian and The Sydney Morning Herald newspapers reported on Thursday that Rudd's Labor party is moving to soften the blow by redefining a windfall or "super" profit to returns on assets exceeding 12 percent, up from 5.3 percent now. [ID:nSGE64P0M8]

The 5.3 percent threshold-- linked to the the 10-year government bond yield AU10YT=RR -- is a key gripe among the miners, who think it is unrealistically low.

A Treasury-sanctioned tax consultation panel is due to deliver its first report to the government on Friday after meeting over the last week with mining companies. The panel's report is expected to focus on the definition of a super profit.

The tax is not due to be introduced until 2012, after the next general election, so there is even a chance the government will be voted out before it can implement it. [ID:nSGE64J02A]

WHAT ARE THE POSSIBLE POINTS OF COMPROMISE?

The least likely point of compromise seems to be the headline rate of 40 percent. But even here, Rudd has some wiggle room, describing the headline rate as "about right".

Beyond that, there are aspects of the complex tax which, if changed, could dramatically lower its impact.

* EXISTING VS FUTURE PROJECTS: Australia's two largest miners, Rio Tinto <RIO.AX (RIO.L) and BHP Billiton (BHP.AX) (BLT.L), have called on the government to exclude existing mining operations and apply the tax only to projects beginning after 2012. The government says such exclusions would forfeit too much revenue and discourage miners from expanding.

Miners can still look to offsetting tax credits for exploration and development costs, resulting in a lower effective tax rate than 40 percent. But what about all the hundreds of billions of dollars already sunk into existing projects? Will the government award retrospective tax credits for these?

The architect of the tax, Treasury chief Ken Henry, has argued against this. But miners have support from some economists who suggest a credit for 40 percent of original investments. However, a group of 20 prominent academic and business economists has publicly backed the tax, saying the sector should fork over more of its profits. The group, including the former chairman of the Australian Competition and Consumer Commission, Allan Fels, issued a statement supporting the tax.

* FINANCING COSTS: Iron ore miner Fortescue Metals Group Chief Executive Andrew Forrest (FMG.AX) says unlike company tax, the new mining tax will hit firms higher up the profit statement, before deducting interest on borrowings. This means banks will not fund new projects unless businesses stump up more equity.

Playing the nationalist card, Forrest says this opens the door to deep-pocketed foreign firms, especially state-owned Chinese ones, to buy up stakes in new Australian projects. A compromise could involve financing costs being excluded from calculations.

* WILL THE GOVERNMENT BACK DOWN ON THE TAX?

Rudd will not reverse course on the tax, despite conservative opposition threats to overturn it if they secure an unexpected victory. But with Rudd's support in opinion polls slipping dangerously and the tax causing unease among voters, fuelled in part by a multi-million-dollar advertising campaign by miners, a compromise to cool the issue politically seems certain.

It is a matter of finding a face-saving solution for Rudd that keeps the resource giants on side.

Even if negotiations break down, there is one last hope for the miners: a legal challenge. The largest mining state, Western Australia, is consulting its lawyers over whether the tax exceeds Canberra's powers under the national constitution, which forbids the centre from taxing the property of state governments. Two constitutional experts cast doubt, however, on whether there would be grounds for a legal challenge. [ID:nSYU009974] (Additional reporting by Rob Taylor in CANBERRA; Editing by Ed Davies)