Earlier today, the Liquefied Natural Gas Income Tax Act (the “Bill”) was introduced into the British Columbia legislature. The Bill reflects the culmination of the Province’s goal to introduce an LNG tax framework, which was initially unveiled in February 2014. The Bill provides for a tier 1 tax rate of 1.5% and a tier 2 rate of 3.5%. The LNG tax applies to the net income from all liquefaction activities in British Columbia.

Effective for the taxation years beginning on or after Jan 1, 2017, the tax rate on net income will be 3.5%. During the period when net operating losses and the capital investment are being deducted, the tier 1 tax rate of 1.5% will apply and is creditable against the 3.5% tier 2 tax. In 2037, the tier 2 rate will increase to 5% of net income. The tier 2 rate set out in the Bill represents a significant reduction from 7% contemplated in the initial framework announced in February.

Since the valuation of revenues, expenses and the cost of capital investment are central to the calculation of the tax, the Bill provides a special set of rules for non-arm’s length transactions applicable to integrated LNG projects and companies, however, there is still significant uncertainty that exists with respect to the application of these rules.

In addition, the Bill establishes a new B.C. Corporate Income Tax Credit which will be available to any LNG Income Taxpayer that has a permanent establishment in British Columbia. The credit will be calculated based on the natural gas acquired for the LNG export facility and will have the effect of reducing the provincial corporate income tax rate from 11% to as low as 8%. The Bill also creates a tax credit in the amount of 5% of eligible expenditures relating to the restoration, reclamation or remediation of the LNG facility site.

In conjunction with the release of the Bill, on October 20, 2014, the British Columbia government tabled theGreenhouse Gas Industrial Reporting and Control Act, which sets a greenhouse gas intensity benchmark for LNG facilities of 0.16 tonnes of carbon dioxide (CO2e) for each tonne of LNG produced. LNG export facilities will have the flexibility to meet the benchmark either through improving energy efficiency, purchasing carbon offsets or by investing in a technology fund at a rate of $25 per tonne of  CO2e. An LNG Environmental Incentive Program will also be introduced that will provide escalating incentives to help mitigate compliance costs for facilities emitting anywhere between 0.16 and 0.23 CO2e.

Each of these measures is designed to provide a reasonable basis to allow discussion and analysis of the various LNG projects to proceed, at least to the next phase. However neither solves or deals with other significant issues confronting the LNG industry in BC - including the pricing and availability of off-take arrangements, the paucity of skilled labor and the resulting potential for escalating capital costs, the timing and costs of obtaining all required regulatory approvals and negotiating final deals with First Nations, as well as vigorous competition from potential US Gulf Coast suppliers, not to mention ongoing lobbying efforts by industry of the Federal government to enhance current capital cost allowance deductions. We believe it is these issues, and not just the terms of the LNG Tax, that will ultimately determine the size, scale and timing of the BC LNG industry.