PotashCorp, US Regulators and Bruce Johnstone

Multinational corporations generally provide more detail to the US Security and Exchange Commission than in their Canadian annual reports. Thank goodness for American disclosure requirements.

Along with its 2010 Annual Report, PotashCorp released its Annual Report on Form 10-K (a Security and Exchange Commission filing) on Friday afternoon. The following section is on pages 14 and 15:

Royalties and Certain Taxes

Saskatchewan potash production is taxed at the provincial level under The Mineral Taxation Act, 1983 (Saskatchewan). This tax consists of a base payment and a profit tax (“Potash Production Tax”). No Potash Production Tax was paid in 2010. As a resource corporation in the Province of Saskatchewan, we are also subject to a resource surcharge that is a percentage of the value of our resource sales (as defined in The Corporation Capital Tax Act of Saskatchewan). In 2010, the total resource surcharge paid was $74.6 million.

In addition to the Potash Production Tax and resource surcharge, royalties, taxes and rental fees are payable to the Provinces of Saskatchewan and New Brunswick, municipalities and others by potash producers in respect of potash sales, production or property in the Provinces of Saskatchewan and New Brunswick. These royalties, taxes and fees, which are included in cost of goods sold, were $97.9 million in 2010.

For 2010, miscellaneous taxes paid (not included above) totaled $2.2 million. We do not make royalty payments in connection with our phosphate and nitrogen operations.

It is good to see the company confirm in plain English what the numbers in its annual report made clear: “No Potash Production Tax was paid in 2010.”

Saskatchewan’s Potash Production Tax, resource surcharge and miscellaneous taxes are labeled “provincial mining and other taxes,” which totaled $77 million in 2010. In modern parlance, this potash production tax system is generally called “royalties.”

However, the historic Crown Royalties are still payable under Subsurface Mineral Regulations and deductible from the Potash Production Tax. PotashCorp includes these royalties in “cost of goods sold.” The Regina Leader-Post’s financial editor, Bruce Johnstone, noted this accounting quirk yesterday:

. . . the $77-million figure is “disingenuous” and [NDP leader Dwain] Lingenfelter knows it. A closer examination of PotashCorp’s 2010 financial statements indicates the corporation reported $3.4 billion in “cost of goods sold” (which includes base royalties) and $642.8 million in income taxes (which include provincial corporate income taxes).

PotashCorp itself compares the $77-million figure (“provincial mining and other taxes”) with “potash gross margin,” expressing the former as a percentage of the latter in every fourth-quarter report. Those of us who reproduce this comparison are being no more disingenuous than Johnstone’s favourite company.

But he has a point: a more comprehensive measure of “royalties” obviously should include the original Crown Royalties. The problem is that we do not have the numbers.

PotashCorp takes a kitchen-sink approach, mixing together Saskatchewan’s Crown Royalties, all of New Brunswick’s royalties, municipal taxes, etc. for a sum of $98 million. Johnstone unhelpfully multiplies that kitchen sink by 35 in referencing $3.4 billion, a company-wide total that mostly comprises nitrogen and phosphate costs incurred outside the province.

Similarly, he cites $643 million of corporate income tax. As I noted yesterday, only about half of that total is current 2010 Canadian tax payments, as opposed to foreign tax payments and provisions for possible future tax payments. And Saskatchewan gets less than half of the Canadian total.

Johnstone seems satisfied to throw around some big numbers that have little to do with Saskatchewan and conclude that the current system is “working very well.” In fact, the opacity of available data is just one more reason the province needs a thorough royalty review.