Potash taxation and Saskatchewan’s investment attractiveness
In March, as part of its provincial budget, Saskatchewan introduced changes to the rates at which potash producers can deduct capital expenditures for purposes of computing profit for the potash production tax regime (PPT). The changes were not well received by all of the potash producers. Some companies issued public statements noting an adverse effect on earnings, while others argued that changing the rules in midstream impacts their ability to deliver fair returns to shareholders, and undermines Saskatchewan’s relative competiveness.
At the same time, the province announced that these initial changes will be followed by a complete review of the overall potash taxation regime, which will involve discussions with all stakeholders. While the initial changes pose some challenges – as well as other benefits, depending on the producer – the challenge will be for Saskatchewan to embrace its creativity through consultations with stakeholders, to come up with an overall potash taxation regime that focuses on solidifying the province’s position as a top jurisdiction in the world for mining investment.
In 2014, Saskatchewan moved up five spots in the Fraser Institute’s Annual Survey of Mining Companies, to rank as the second most attractive jurisdiction in the world for mining investment (Manitoba, incidentally, moved into the top 10 in 2014, after ranking 13th in 2013). Saskatchewan also ranks highly in the survey when it comes to the attractiveness of its mining policies – in fact, the region rose in the rankings from 12th in 2013 to 6th in 2014. But when it comes to taxation, Saskatchewan falls out of the top ten. For the province to maintain, and indeed strengthen, its position in 2015 and beyond, those involved in the review of the potash taxation regime must carefully consider the implications of proposed measures.
Looking more closely at the initial changes, as expressed by some producers, the measures may negatively affect producers’ cash flows, as they will generally pay more PPT in earlier years, and less in later years. However, the changes also give producers a 120% super allowance on all capital expenditures incurred in 2015 and subsequent years (this super allowance formerly only applied to capital expenditures in excess of the 2002 threshold amount, which was an amount equal to 90% of the producer’s capital expenditures in 2002). This change will not affect new producers who did not have a 2002 threshold amount, since they were already entitled to the super allowance on all of their capital expenditures. But for producers who were in business and incurred capital expenditures in 2002, these changes should produce a positive result because of the extra deduction for super allowance depreciation.
This budget change didn’t just apply to expenditures incurred in 2015 and subsequent years. Un-deducted capital expenditures from prior years which would have been available for a 100% rate of depreciation suddenly are only deductible at a rate of 60% per year. Similarly, any un-deducted capital expenditures from prior years which would have been deductible at 35% are now only deductible at a rate of 20% per year.
By way of background, Saskatchewan levies a Crown royalty of 2% to 3% (depending on the grade) of the sale price of potash, and a resource surcharge of 3% of gross revenue from the sale of potash. In addition, under the PPT rules, the province charges a base tax (based on tonnes of potash sold), and a profit tax (based on profits). Profits are computed by deducting from gross revenue a variety of deductions including depreciation in respect of capital expenditures. It is this depreciation that is the focus of the budget changes.
No doubt, potash production has helped bump Saskatchewan’s attractiveness from a mining sector investment perspective. For the province to continue to maintain its position as a top jurisdiction in the world for mining investment, the review of the potash taxation regime must stay focused on sustaining that attractiveness – while at the same time providing a fair return to the province. This means producers need to be confident that the rules will not change in midstream, after they have made major capital expenditures on expansions. In the meantime, producers will benefit from the super allowance applying to all of their capital expenditures.
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