PotashCorp Projects Low Royalties

The following commentary was quoted on page D1 of yesterday’s Saskatoon StarPhoenix and Regina Leader-Post:

Thursday’s fourth-quarter report indicates that PotashCorp paid “provincial mining and other taxes” of $194 million on potash sales of $3 billion in 2013. In other words, Saskatchewan’s resource surcharge and potash production tax amounted to just 6.5% of the value of potash sold.

Adding the basic Crown royalty (which PotashCorp includes in “cost of goods sold”) and subtracting New Brunswick potash suggests that Saskatchewan is collecting no more than a dime per dollar of potash extracted from the province.

PotashCorp’s guidance for 2014 projects “provincial mining and other taxes” not as a percentage of potash sales, but as a percentage of potash gross margin. While Saskatchewan’s resource surcharge is 3% of sales, the potash production tax’s statutory rate is 35% of mine profits (i.e. gross margin).

Yet PotashCorp predicts that both payments combined will actually amount to between 16% and 18% of potash gross margin this year. The old excuse for such low royalties was that potash companies were making large investments in Saskatchewan (which the provincial government allowed them to write off at 120%).

But PotashCorp has completed its major investments. Far from expanding, it is laying off workers. So, why does it expect to pay only about half of Saskatchewan’s potash production tax rate?

The biggest problem is that potash companies enjoy an endless holiday from Saskatchewan’s potash production tax on all tonnes in excess of the average sold in 2001 and 2002. The solution to Saskatchewan’s upcoming budget crunch is to close such loopholes in the provincial royalty structure.

Erin Weir is an economist with the United Steelworkers union and a CCPA research associate.

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