Canadian Manufacturing

Potash royalty structure in Sask. ‘alarmingly inefficient’: report

University of Calgary professor suggested approach contributes to instability in potash industry, said it should be simplified

REGINA—A new report claims Saskatchewan’s potash royalty structure needs to be overhauled because it is too complex and “alarmingly inefficient.”

Jack Mintz, a professor at the University of Calgary, said the royalty program is the most complicated in the world.

“Hardly anyone understands the Saskatchewan system,” said Mintz, who is the director of the university’s School of Public Policy.

His report released states that while Saskatchewan produces almost one-third of the world’s potash, its tax on the resource isn’t competitive on an international level.

“What you really want is something that’s stable,” said Mintz, who added that there are wide fluctuations in the current approach.

The royalties collected by governments from resource companies help fill provincial coffers.

Saskatchewan’s system includes a production-based levy, revenue-based levies, profit-based taxes and other taxes on capital investment.

“Saskatchewan is competitive as long as there is a lot of investment that is undertaken by firms,” Mintz said. “But it’s not very competitive—in fact it actually has the highest effective tax rate on investments compared to any other country that we look at—when companies aren’t investing as much as the 2002 period.”

Investments are treated differently depending on when companies were established.

For those producing potash in 2001 and 2002, the maximum taxable volume was their average sales in those years.

For those who were not producing potash until after 2002, the maximum taxable amount is 75 per cent of their sales—but for no more than one million tonnes.

In the report, Mintz and co-author Duanjie Chen compared Saskatchewan’s system to New Brunswick as well as to Canada’s international competitors.

Mintz said royalty structures in both provinces result in lost revenue during boom periods, but too much revenue is taken from companies when their production slows.

New Brunswick has a better-designed system than Saskatchewan, he said, but it’s still not a model of efficiency.

Mintz suggested the approach contributes to instability in the potash industry.

He said he believes Saskatchewan would have had billions of dollars in extra revenue between 2009 and 2014 using a rent-based tax system.

“What we are recommending would be a very stable (system) in the sense that the government would get good revenues when the prices are high, the industry won’t get whacked with a bunch of taxation when revenues are down,” he said.

Premier Brad Wall said he doesn’t agree with Mintz’s calculations.

“There’s a number of problems with Mr. Mintz’s numbers,” Wall said. “Chief among them is that he’s underestimated potash revenue annually every year by $150 million … from 2006 to 2013.”

Wall said he thinks the province has received a “pretty good return” when average potash revenue over time and job growth are factored in.

But Wall agreed the current royalty system is complex.

“Together with industry, we need to have a stable, arguably more simplified, royalty process that makes sure we’re getting value for Saskatchewan people,” he said.

NDP finance critic Trent Wotherspoon agreed that royalty policy is in need of review.

“I think there are some valid questions being asked,” he said. “There was an aim to encourage investment in Saskatchewan in that potash sector and that investment has been unprecedented.”

Wall said the current structure encouraged the expansion of the potash industry.

“These investments are massive and they’re made and they’re in the ground,” Wall said.

He added that he wouldn’t be concerned about companies scaling back production if royalties changed.

“I don’t think it’s just a royalty comparison companies make,” he said. “They look at ease of doing business.”

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