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Monday, March 21, 2011 

Royalty Structure Hurting Saskatchewan

The following is written by Erin Weir, a former Saskatchewan resident who is the senior economist for the International Trade Union Confederation.

In the article, PotashCorp royalties, taxes understated: exec. (SP, March 11), PotashCorp chief financial officer Wayne Brownlee argues that investment in mine expansions will soon provide a bonanza of revenue for Saskatchewan, at the world's highest potash royalty rates.

In fact, Saskatchewan's current royalty regime will unduly limit future revenue. International competition should not dissuade the province from collecting more.

The most important component of Saskatchewan's royalty regime is a potash production tax based on mine profits. PotashCorp did not pay this tax in 2010 because it received investment writeoffs that exceeded the second-highest profits in the company's history.

PotashCorp and Agrium expect to complete their capital investments by 2015.

However, Mosaic has announced investments through 2020.

Since the allowable deduction is 120 per cent of the amount invested, companies may have deductions left to carry forward after their investments are finished.

This "onetime incentive" will continue reducing provincial potash royalties for a decade.

Thereafter, sales above the average sold in 2001 and 2002 will still enjoy a never-ending holiday from the potash production tax. In other words, companies will go back to paying this tax only on the tonnage they produced a decade ago. Revenues could be higher if this tonnage is sold at higher prices.

If anything, increased production actually tends to put downward pressure on prices. Certainly, it will not add to potash production tax revenue.

Additional tonnage will only be subject to the resource surcharge, set at three per cent of sales, and Crown royalties. PotashCorp initially reported paying $77 million of surcharge, and recently disclosed paying $70 million of Crown royalties, on Saskatchewan potash sales of $2.8 billion in 2010.

Taken together, the resource surcharge and Crown royalties amount to five per cent of sales. For every additional dollar of potash extracted, Saskatchewan people will receive a nickel of additional resource royalties.

Brownlee presents corporate income taxes as a substitute for royalties. However, they reveal that PotashCorp's 2010 corporate tax payment to Saskatchewan was just $82 million, less than it paid to Trinidad, and only one-quarter of its total Canadian corporate tax bill.

Most tax revenue flows to Ottawa and other jurisdictions where PotashCorp operates. Mosaic, an American company, also pays U.S. corporate tax on profits repatriated from Canada.

Corporate taxes do not effectively compensate Saskatchewan for the depletion of provincial resources. Indeed, all industries are subject to corporate tax whether or not they extract resources.

Finally, Brownlee contends that Saskatchewan should not raise royalties because it already has "the highest potash royalty rates in the world."

The only evidence ever cited to support this claim is the Potash Cost Report from CRU Group, a private consultancy. Since CRU charges 15,000 British pounds ($24,000) for this data, it is not realistically accessible to anyone but corporations and the government.

The U.S. Geological Survey's publicly available report indicates that Canada has 46 per cent of global potash reserves. A further 43 per cent is controlled by oligarchs in Russia and Belarus.

The only other countries with more than two per cent of global reserves are Brazil and China. Both restrict foreign ownership of potash, and have state-controlled enterprises in the industry. Even if they have lower royalties, multinational potash companies cannot necessarily shift investment to these countries.

Furthermore, Saskatchewan has the world's richest reserves closest to the world's largest potash consumer: the American corn belt. These natural advantages should allow Saskatchewan to collect the world's highest potash royalties.

To do so, the province needs a comprehensive public review of royalties rather than relying on the dribs and drabs of information that PotashCorp chooses to disclose.
Erin Weir

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