Wednesday, September 01, 2010

BHP Billiton ‘has no intention of becoming incorporated’ in Saskatchewan: SREDA; company says tax abatement request an ‘administrative error’

Corporate Services report from July 21, 2010, city council agenda

BHP Billiton is in the midst of a dramatic US$38.6 billion hostile takeover bid for the world’s largest fertilizer producer, Potash Corporation of Saskatchewan.

The world’s largest mining company, on August 25, 2010, reported earnings of $12.72 billion for the fiscal year ended June 30, more than double the $5.88 billion earned in the previous year.

BHP’s revenue increased 5.2% to $52.8 billion from $50.21 billion. The company’s cash position also improved, swelling 15% to $12.46 billion from last year’s $10.83 billion, in spite of $9.8 billion in capital investment and debt reduction, the Wall Street Journal reported. [BHP vows restraint in its bid for Potash (Wall Street Journal, August 26, 2010)]

Despite the staggering riches, the Australian-based mining giant sought a five-year tax holiday from the City of Saskatoon for its new office space located in the downtown core.

City council was set to consider the matter on July 21, 2010. However, just prior to the meeting, representatives from BHP approached corporate services general manager Marlys Bilanski and asked that the request for tax abatement be withdrawn.

“They indicated that there was some confusion when the application was initially made and it was not their intent to request an abatement,” the city said in an email response to a query. There was nothing in writing, only the verbal request.

Gordon Graham, the company’s project director for potash development, elaborated further in an email on August 30, 2010: “The essence of the situation is there was an administrative error made in our office, and we had not planned on applying for the tax abatement. When we discovered that it had however been submitted, and was scheduled for discussion, we asked the council to pull the application.

“At this time we have no plans on resubmitting the application.”

BHP’s explanation seems a little suspect given that the application had been in the system for nearly two years and company lawyers were corresponding with officials in Saskatoon. Then there’s the timing. The decision to pull the plug on the request came just three weeks before BHP first approached PotashCorp on August 12, 2010, with a proposal to combine the two companies. The company is currently trolling for public support through feel good, full-page ads in the StarPhoenix and Leader-Post. News of a tax break might not go over too well right now.

The city’s business development incentives policy is designed to encourage companies to locate or expand their operations in Saskatoon, create new employment opportunities, place Saskatoon in a competitive position in attracting businesses that it would not otherwise occupy, increase the long-term viability of a project, and/or demonstrate the city’s commitment to a business or industry.

The policy offers corporations meeting the eligibility requirements for a property tax incentive a tax abatement of up to 100% of new or incremental taxes in year one, 80% in year two, 70% in year three, 60% in year four, and 50% in year five.

The value of incentives for new or local expansions in the manufacturing or processing sectors that will create 100 or more new, full-time or full-time equivalent employees may be eligible for tax abatements of up to 100% of new or incremental property taxes for a period of five years.

The Saskatoon Regional Economic Development Authority (SREDA) administers the policy on behalf of the city. An incentives review sub-committee consisting of five members of SREDA’s board of directors, one of which is a representative of city council and the general manager of corporate services or designated appointee, evaluates applications.

The SREDA board then reviews each incentive application and reports to city council recommending acceptance or denial of the request.

In a memo dated July 9, 2010, SREDA chair John Cross informed the city’s corporate services general manager that BHP’s incentive application was received on July 28, 2008.

Cross said BHP’s application was complete with one exception: “BHP is not currently incorporated in the Province of Saskatchewan, and has no intention of becoming incorporated in the Province of Saskatchewan.”

The SREDA board initially approved the application on July 30, 2009, “pending BHP correcting the deficiency in the application.”

BHP legal counsel, Fasken Martineau DuMoulin LLP, in a letter dated July 29, 2009, argued that “BHP Billiton Diamonds Inc. is incorporated pursuant to the Canada Business Corporations Act, under Corporation Number 448237-9, is in good standing with respect to the filing of Annual Returns, and has not been dissolved under that Act, and the Corporation is extra-provincially registered in Saskatchewan under Entity Number 101139980, with all required filings up to date.”

Cross concludes by stating that the SREDA board approved the application for submission to city council.

According to a separate memo from SREDA CEO Tim LeClair to Bilanski, dated February 15, 2010, the organizations incentives review sub-committee recommended approval of BHP’s application in February 2010.

SREDA approved the application without knowing the estimated value of the five-year tax abatement. In an email dated July 16, 2010, Bilanski notes that “this totally depends upon when and to what degree the building will be occupied and finished as tenancy increases. The maximum will be somewhere in the order of $150,000 (includes municipal, school and library taxes.)”

In his memo, Cross describes a similar situation with an application from Alstom Canada Thermal Services requesting a five-year tax abatement. Apparently, Alstom is not currently incorporated in Saskatchewan either, yet it appears SREDA did not ask the company to correct the deficiency. It instead argued that pursuant to the provisions of the Business Corporations Act (Saskatchewan) extra-provincially registration accords a corporation the same rights, privileges, and obligations to carry on a business, own land, initiate suits, etc. as if it had been incorporated in Saskatchewan.

“If there is no clear reason for Alstom to be incorporated in the Province of Saskatchewan, incorporation should not be required,” Cross said. On that basis, it appears SREDA approved the application for submission to city council. Without actually saying so, it would seem that SREDA is using the same rationale for approving the BHP application.

The problem is, regardless of what BHP’s lawyers and the province’s Business Corporations Act say, the application from BHP doesn’t appear to comply with the city’s business development incentives policy.

The city’s incentives policy is explicit; to be eligible for an incentive “all of the following criteria must be met.” The very first item on the list of requirements is: “The applicant must be a legally incorporated corporation in the Province of Saskatchewan.”

Cross said that BHP is not currently incorporated in the province. And yet, SREDA says in a document attached to Cross’s memo that the company “meets all of the eligibility requirements” of the city’s policy.

There is no grey area. The city goes so far as to bold and underline the word ‘all’ to drive home the importance of the eligibility criteria. The policy does not say that being extra-provincially registered satisfies the requirement that applicants must be a legally incorporated corporation in the province. The city has the power to amend the policy but hasn’t.

The policy does provide, upon the advice of SREDA and with the approval of council, for the criteria to “be waived or modified to recognize the uniqueness” of an incentive request. However, SREDA did not advise council to do that. The agency simply recommended the application be approved. BHP may be somewhat new to the city but they’re hardly unique.

BHP’s request for a tax break was all but ignored by the media. It seems only radio stations NewsTalk 650 and NewsTalk 980 took notice.

Mayor Don Atchison, who happens to be a SREDA board member, had no qualms with the tax abatement insisting it is a normal way of attracting business investment.

“Six years from now, when you still have nothing, you’ll still have nothing. It’s not into perpetuity. It’s (just) five years.” [Saskatoon Deciding on Proposed Tax Break for BHP (NewsTalk 650, July 21, 2010)]

Following the company’s decision to withdraw its request, Atchison said he understands that for some, the world’s largest mining company asking for a tax break might not look good, but maintains there’s a benefit to a five year tax break.

He says Saskatoon is competing with other cities to attract large companies like BHP Billiton. [Mining Giant Withdraws Request For Tax Break In Saskatoon (NewsTalk 980, July 22, 2010)]

Getting into the potash business has been on BHP’s radar for quite a while.

In the first issue of its quarterly newsletter Potash Pages, the company points out, “The potash industry is a fundamentally attractive one, with only three major basins (Canada, Belarus and Russia) and a growing world market. The potential for BHP Billiton in Saskatchewan is substantial with over 7,338 square kilometers of highly prospective exploration permits in the immediate vicinity of existing major potash mines. BHP Billiton is focused on developing the first new potash mine in almost 30 years in the province of Saskatchewan.” [Potash Pages, September 8, 2008]

It’s hard to imagine BHP would let a $150,000 tax abatement get in the way of coming to the province. There’s too much money to be made.

BHP is leasing the entire Discovery Plaza, located at 130 3 rd Ave. South. The office, according to SREDA, is the headquarters for Project Jansen and the Athabasca scale up and operations.

Discovery Plaza Inc. is owned by John Williams, president of North Prairie Developments Ltd. In the company’s November 2009 newsletter, North Prairie announced that BHP would be “the first major tenant” in the recently completed building.

Discovery Plaza is located on the site of the former Extra Foods, the downtown’s only grocery store that closed October 9, 2004.

In April 2006, Williams confirmed that his company bought the building. [Grocery Store Sold (StarPhoenix, April 12, 2006)]

In an interview with the StarPhoenix on April 15, 2008, Williams confirmed that a new office building would be built and should be ready for occupancy by June 2009. Williams said the investment was going ahead even though he had no firm commitment from a tenant.

“We’ve been talking to a few people, but we don’t actually have a firm lead client at this point in time, so we’re still working on a spec basis,” Williams said. “But we think the market’s there.” [Developer plans new four-storey building downtown (StarPhoenix, April 16, 2008)]

BHP’s subsequent tax abatement request in late July 2008 fits the timeline nicely.

However, the BHP website shows the company didn’t move to Saskatoon until September 2008 when its potash development office opened at Innovation Place.

SREDA helped roll out the red carpet for BHP on January 22, 2009, hosting a reception at the Sheraton Cavalier to welcome the company to the city.

BHP moved into Discovery Plaza on January 25, 2010. [BHP Billiton Expands Potash HQ (NewsTalk 650, January 31, 2010)]

City of Saskatoon business development incentives policy

BHP Billiton Saskatoon Office at Discovery Plaza

BHP Billiton ad, StarPhoenix, Aug. 27, 2010

BHP Billiton ad, Leader-Post, Aug. 28, 2010


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