Competing in the global LNG market: Evolving Canada's opportunity into reality

Fiscal policy

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Fiscal policy plays a crucial role in determining Canada’s competitiveness. Government must balance the pressures to achieve a fair return with the need to encourage investment in the sector. That will require collaboration between government and all relevant stakeholders to identify the most effective framework and ensure BC projects are competitive in the global context. There is already an established royalty framework that applies to the production and sale of natural gas in BC. The province also has sales tax, fuel tax, and carbon tax regimes and an extensive property tax system.

The 2014-15 BC Budget announced a proposed framework for an income tax regime applicable to income from liquefaction of natural gas at LNG facilities in the province. This “LNG Tax” will be a two-tier income tax with a tier-one tax rate of 1.5% and a tier-two rate that is yet to be determined, but could be up to 7%.

The tier-one tax rate is proposed to apply to an operator’s net income at the commencement of commercial production and to be deductible from the tier-two tax. The tier-two tax is proposed to apply to the net income less the costs associated with the capital investment from the construction of the LNG facility. The tier-two tax would only apply once the capital investment in the LNG facility is recovered.

The tax is designed to provide revenue to the BC government from day one of operation and then increase once initial capital costs are recovered. The current BC mineral tax operates in a similar manner so in some ways the concept of the tax isn’t unfamiliar. However, the LNG Tax is expected to encounter additional complexities given the multiple different ways in which LNG will be produced and exported.

The BC government recognizes the need to prepare a tax regime that is globally competitive and, after announcing the proposed framework in the Budget, is working with project proponents to ensure that the income tax rate will not deter investment. Recent consultations have focused on the tier-two tax rate and the income base on which the tax will be levied.

The implementation of a new tax regime is always challenging. The fiscal benefits of a resource endowment through a tax take must be balanced with the need for an adequate investment return for LNG developers. Revenue will only be realized if LNG projects proceed, and many believe BC’s large gas reserves will be stranded or very slowly developed and sold into lowpriced North American markets if export LNG facilities are not developed.

Investment decisions hang on greater certainty around the application of the BC LNG tax, particularly the total BC tax take. Proponents are also looking for assurance that tax and other fiscal policies will not change adversely in the future once they have committed to projects and incurred capital costs. On a positive note for projects, the BC government has signalled through a very active process that it knows it must act quickly to provide this certainty to enable projects to move forward and compete globally.