Potash Corp Saskatchewan deferred paying most of their income tax in 2013, largely because they put a lot of money into new equipment. They say their larger contribution to their property, plant and equipment is because they are increasing their potash production.

Canadian potash exports in 2013 were close to $5.7 billion and Potash Corp. contributed with nearly $1.5 billion in offshore potash sales last year alone. In their 2013 annual integrated report they recorded their income taxes for the year to be $687 million.

Even though deferring taxes sounds like they are trying to avoid paying what they owe, Heather Sceles, an accounting lecturer at Saint Mary’s University, says it is a perfectly legal and common thing for a business to do.

Thanks to various deductions and assets, including those gained through their new property, plant and equipment increases, Potash Corp is able to put off paying a portion of their taxes for an undetermined amount of time.

Even though they do not have to pay all their taxes right now, Potash Corp still has to record what they owe for taxes in their 2013 annual report. That way it is clear to investors and accountants what the company’s financial obligations are in the future.

In 2013, Potash Corp made $2.4 billion before taxes. Through a combination of federal and provincial taxes that amount to almost 27 percent all together, they owe a grand total of $687 million in taxes for the year. But they only paid a little over a third of that number. In 2012 they paid $676 million in full.

So how could they hold off on paying the other $489 million?

There are a couple factors that play into that including their investment in their property, plant and equipment to help increase their potash production.

Potash Corp’s taxes came to $687 million in 2013, however, they only owe $290 million right away, but they only paid $189 million according to their annual report.

Sceles says a company’s income tax is based on an estimated income influenced by what they made in the past. So when the final numbers come out in the year end statement it is possible that too much or too little was paid in tax because the estimation could be more or less than a company’s actual income.

“They may have overpaid their taxes in the prior year, then they have less to pay this year,” says Sceles.

Because Potash Corp’s income in 2013 was less than 2012, the estimation was off so they only had to pay $189 million in taxes last year.

Then there is what is called deferred income tax, which is where the other $397 million owed in taxes comes. This is also where the investments in their property, plants and equipment is a benefit tax wise.

Sceles admits that deferred taxes are complicated and often hard to wrap your head around. “It’s a bit of a confusing topic,” says Sceles. “Our accounting majors even find deferred taxes a bit challenging.”

The main contributor to Potash Corp deferring their taxes in 2013 is their property, plants and equipment assets. $325 million of their deferred taxes comes new investments in their property, plants and equipment.

In 2013 Potash Corp transferred, which means either bought or built, more than $1.9 billion in machinery and equipment. In their annual report Potash Corp says 71 percent of

that went towards increasing potash production. From that new equipment Potash Corp gained tax deductions that can be spread over a number of years.

According to Potash Corp in a statement about their goals, “we initiated expansion and debottlenecking projects at all six of our potash mines.” This expansion includes a new mine and expanded mill in New Brunswick that is expected to be finished this year.

Equipment for the increase of potash production, however, is an asset that depreciates over time. The equipment gets older and depreciates and so does the tax deduction that comes with it. Potash Corp lists their equipment life span to be between three and 60 years.

Deferred taxes come in when a company’s accounting of depreciation for tax deductions is done differently than how the government accounts for it. Sceles explains that companies will spread the depreciation and deductions evenly over a number of years. The government, however, starts with a higher deduction in the beginning and it lessens over time as the piece of equipment depreciates.

Potash Corp put almost $2 billion into property, plant and equipment in 2013, and according to Sceles, their accountants recorded it at a lower depreciation than what their taxes show. So they are able to defer paying the difference. However, in the future they will have to pay more taxes because their accountant’s depreciation and deductions will be lower than what their taxes show.

“We kind of get a flavour that they are investing in their business,” says Sceles. “They have a lot of new equipment they’re putting into service and we know that for tax purposes you get a larger deduction when you’re equipment is newer in the earlier years because of this diminishing balance calculation.”

Even though Potash Corp was able to defer a large portion of their income tax in 2013 because they put more money into property, plant and equipment to expand their potash production, in the future they will potentially have to pay more in taxes because as the equipment ages, the tax deduction diminish.