The package of concessions that BHP Billiton Ltd. is offering to gain Saskatchewan-government backing for a buyout of Potash Corp. of Saskatchewan POT-T isn't something you see every day in the world of mergers and acquisitions. In fact, other buyers looking at big acquisitions may be looking at BHP and wondering "What have you set us up for?" by creating this precedent.
BHP has proposed to essentially waive two of its biggest tax advantages stemming from the proposed acquisition. BHP has offered to give up the deduction it would get from development costs of a new potash mine, which could be used to reduce taxes on Potash Corp.'s future production. And, BHP has offered to only use about a third of the interest-cost deduction from acquisition debt that it could legitimately take under Canada's thin-capitalization regime.
In both cases, BHP is giving up something that it would be legitimately entitled to under existing (and longstanding) tax rules.
The result is a package that BHP says will save Saskatchewan about $300-million a year in tax revenue that otherwise would be lost. Of course, BHP shareholders are the ones that would pay that price.
The concessions are causing heartburn among some of the number crunchers who are looking at the deal, according to sources, but were viewed as necessary to try to get the province on side.
Even BHP executives acknowledge that it's a "special deal" for a special situation.
But that likely won't stop other governments from asking for similar concessions in return for their support in deals where lost tax revenue is going to be an issue.
