The BC Government has now tabled Bill 6, the Liquefied Natural Gas Income Tax Act.
Bill 6 sets out the features of the new tax regime, which has been the subject of great scrutiny, negotiation and political pressure since the spring.
The essential features of the tax are as follows:
- Commencing in 2017, a 1.5% tax is payable on the net income from liquefied natural gas operations. This tax is payable until all capital costs incurred in connection with the facility have been recovered. This tax is creditable against the 3.5% tax levied after capital costs have been recovered.
- Once capital costs have been recovered, the tax rate rises to 3.5%.
- On January 1, 2037, the post-payout tax rate rises to 5%.
- Tax credits will be provided which will reduce the B.C. corporate income tax for LNG facilities from 11% to 8%
The tax rates in Bill 6 are significantly lower than those first proposed in the BC government's spring budget (1.5% for 3 years, rising to 7% after 5 years). A number of factors have been cited in the decision to provide these lower rates, including pressure from producers, declining commodity prices, and global competitive pressures (including the recent China-Russia natural gas deal).
In introducing the Bill, B.C. Finance Minister Mike De Jong used an example of one hypothetical producer that would have paid approximately $1.5 billion in taxes over 10 years under the earlier proposal, and stated that the same producer would pay only $800 million under the revised proposal.
There are many complicated definitions and deeming provisions in Bill 6, some of the most important of which are as follows
- Income from LNG operations is broadly defined, and includes income from the purchase and sale of natural gas, income from operating LNG facilities (e.g. tolling arrangements), income from the sale of electrical power from an LNG facility, the purchase and sale of personal property related to LNG facilities, and the acquisition and disposition of LNG facilities themselves. The last two points are particularly problematic as these are activities that would not normally be subject to taxation as income, but would be subject to taxation as capital gains. Further analysis of this point is required.
- feedstock pipelines do not form part of the LNG plant for purposes of income calculation
- elaborate transfer pricing rules are provided, under which fair market prices are deemed for transactions (either upstream or downstream) which do not take place at arms length. On the upstream side, non-arms length transactions take place at reference prices
Reaction from industry has so far been positive, with several representatives lauding the government for recognizing the reality of global competitive pressures.