A correction on LNG tax column, but questions remain

KAMLOOPS — In this week’s column (January 17, 2017), I mistakenly described BC Hydro’s eDrive rate as being dissimilar from their Industrial rate. In fact, Jennifer Siddon, Associate Vice President, Corporate Communications of Woodfibre LNG, correctly pointed out that they are both the same and available to all large industrial users.

I agree with Ms. Siddon, but does that mean LNG proponents will be treated the same as all other industrial rate users?  That is a somewhat complicated question but for the most part, the answers can be found in a report prepared by the Canadian Petroleum Tax Journal.

In that report, the journal details the specifics of the tax relationship between British Columbia and LNG producers. In their introduction, the Tax Journal summarizes those changes, writing:

“In October 2014, the BC government released Bill 6 – 2014: Liquefied Natural Gas Income Tax Act (“Bill 6”) and Bill 2 – 2014: Greenhouse Gas Industrial Reporting and Control Act (“Bill 2” or the “GGIR”), both of which received royal assent on November 27, 2014. Bill 6 introduced legislation (the “LNG Act”) for a new BC provincial income tax on natural gas liquefaction activities (the “LNG Tax”), as well as a related BC provincial corporate income tax credit (the “Gas Credit”). In recognition of Canada’s challenges in competing in the global LNG industry, Bill 6 included a number of substantial revisions from BC’s initial February 2014 Budget proposals for the LNG Tax to make the tax less costly for proponents, including a reduction of the tier two tax rate and the introduction of the Gas Credit. Bill 2 addresses the management of greenhouse gas emissions from the point when gas enters a facility to where it is loaded on to ship or rail for market.” 

The LNG Tax Act also allows LNG producers an accelerated method for deducting capital investment cost and states,  “…a taxpayer is entitled to deduct up to the full amount of its CIA (Capital Investment Allowance) balance in computing net income subject to tier two tax. Thus, an LNG taxpayer should not be subject to tier two tax on income from an LNG source until such time that the taxpayer has claimed the full amount of its CIA balance for that source.”

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Bill 6 seems to be saying no tax until all costs have been written off as opposed to the depreciation method all other businesses must use.

The two-tiered system offers other advantages, with Tier One rates set at 1.5 per cent of net operating income and Tier Two set at 3.5 per cent of net income. The legislation goes on to state, “Tier One tax is creditable against Tier Two tax, such that the maximum aggregate LNG Tax payable will be at the tier two tax rate (3.5 per cent).”  This rate is locked in through to 2037.

The Act offers an additional credit (Natural Gas Credit) of 0.5 per cent for all “eligible costs of natural gas”.

The journal’s report was prepared in 2014 and it states, “As proponents continue to work with the BC Government on details of the LNG Tax, it is anticipated that amendments to the existing legislation will be proposed in 2015.”           

The standard business income tax rate in BC is 11 per cent and so it would appear the province is offering a tax inducement of 7.5 per cent.

So is it fair to say that LNG operations and industrial users are getting the same deal?  Special legislation was enacted to restructure the tax relationship with LNG proponents that has not been offered to industrial users, so is the playing field as level as Ms. Siddon implies?

It would appear that the cost to purchase power is indeed the same but tilted when it comes to contributing tax dollars to the province, giving the advantage to LNG as opposed to say, a pulp mill.

Is it a subsidy? It’s your call but we know that provincial shortfalls in taxes have to be made up somewhere and historically that is the regular taxpayer.