A tax policy expert says Saskatchewan’s potash royalty structure is a complicated “mess” and Premier Brad Wall has “his head in the sand” if he thinks it’s working.
Jack Mintz, with the University of Calgary, said in report released Friday that the current royalty and tax system for Saskatchewan’s potash industry “has actually reached the point of incoherence and absurdity.”
“It’s incredible, really,” Mr. Mintz said at a news conference in Saskatoon.
“I mean I’ve worked [in] a lot of countries and this is absolutely incredible as a system. In fact, in my view it’s the worst royalty system I’ve seen in Canada.”
The report said the “tangled thicket of royalties, taxes and credits” can differ between start dates for production, projects of different sizes or even projects of similar size but with different profitability. It also has potash producers generally enjoying a much lighter tax burden on marginal investments than those in other industries, according to the report.
“The result is distortions and inefficiencies, resulting in subpar investment activity, which can only stand in the way of Saskatchewan reaching its full economic potential.”
The government collects royalty money from companies that develop resources and that has helped fill provincial coffers.
The potash royalty system has layers of levies, includes a production-based levy, revenue-based levies, profit-based taxes and other taxes on capital investment.
Investments are treated differently according to whether the company existed prior to 2002.
For those producing potash in 2001 and 2002, the maximum taxable volume is their average sales in 2001-2002. However, for those who were not producing potash until after 2002, their maximum taxable amount is 75 per cent of their sales but for no more than 1 million tonnes.
All of it is overly complex, said the report.
“Such complexity not only undermines economic efficiency...but also causes confusion and wasted resources in compliance and administration.”
The report said that needs to change. It said it’s possible to develop a far simpler and efficient royalty structure.
“Such a properly structured royalty and tax system can deliver improved productivity, without reducing investment incentives, resulting in a better partnership for both Saskatchewan’s industry and government in the long run.”
Mr. Wall mused in August, 2012, about adjusting the way the province collects money from companies that extract natural resources.
The Premier said companies should have royalty stability especially after they’ve spent billions investing in the economy. But he also said it’s important that taxpayers are properly compensated if in 20 years potash production has doubled.
However, the Premier also said it could be years before the discussion gets into any specific detail and there might just be some tweaking rather than any major adjustments. Mr. Wall also said the province and industry would work together to avoid “royalty shock.”
The Premier said Thursday that he had heard a little about the report and was braced for it.
“It wouldn’t be the first broadside that Jack has delivered. He’s very good at what he does,” Mr. Wall said before the report was released.
“I think it’s good for all governments to have someone on that flank, so to speak, on the tax competitiveness and simplicity flank, always pushing the envelope. It’s helpful to us.
“But I would just say this – of all of the jurisdictions in the world that have potash...I don’t know where there’s one that is welcoming about $12-billion in expansion, thousands of construction jobs, hundreds of new jobs to come and so, while there obviously are anomalies within the system, it seems to be working pretty good for the province’s economy.”
Mr. Mintz suggested the Premier’s not seeing the whole picture.
“I’m afraid the Premier has got his head in the sand,” said Mr. Mintz.
“Just because you’re getting $12-billion more in the potash industry doesn’t mean you’re necessarily getting a high amount of investment in Saskatchewan on the whole. So I think you want to make sure that you’re actually developing the economy in a very balanced way.”