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What purpose does the LNG tax have besides being a revenue-grab?
The BC proposal for a new tax on proposed Liquefied Natural Gas plants certainly galvanized negative reaction from some producers. Project proponents like Shell and Chevron expressed concerns over its economic feasibility (Imperial Oil, of which I am director, said less). On the other hand, the B.C. government claims that the projects will be tax competitive with the U.S. and Australia, resulting in large employment gains to the province.
The BC government also forecasts that the projects will yield substantial new provincial revenues – the new LNG tax as well as corporate, personal, and sales tax revenues ranging from $4-billion to $11-billion annually (2012 prices) depending on prices and capacity. So lots at stake for the BC economy in terms of jobs and revenues.
Yet, I think the new LNG tax proposed by BC raises critical issues that go beyond questions of competitiveness and revenues. The new LNG tax could create a policy precedent that could lead to poor tax policy in the coming years in Canada and not necessarily in the interests of British Columbia itself.
The public description of the new tax is rather hazy with a rather flimsy two-page backgrounder. A two-tier tax applies to net income with some twists. A minimum tax of 1.5% will be applied to net proceeds (revenues less expenses) after production takes place. A second-tier tax of up to 7% will apply to net proceeds with pre-production investment expenditures fully written off until recovered. The minimum tax is credited against the second tier profit-based tax.
It is unclear as to what expenditures are included in expenses, such as corporate income taxes and borrowing costs (typically interest deductions are not permitted if capital costs are fully deducted). It is also unclear whether investment costs and unused minimum tax credits will be carried forward at a rate of interest to preserve the time value of the credits.
The BC LNG tax is cleverly designed to avoid any constitutional limitations. Under the 1867 British North America Act, a province can only apply a direct tax raised for provincial purposes. Further, a province cannot levy a tax that interferes with trade, such as tariffs and export taxes. Thus, the province resorted to a direct tax like the income tax that is consistent with the Canadian constitution.
Even though constitutionally acceptable, however, the LNG tax is not appropriate tax policy for a variety of reasons.
First, this special tax seemingly applies to economic profits from LNG, similar to the BC mining tax, by allowing all costs to be deducted from revenues (economists call this difference economic rent).
For the rest of this articlec, click here: http://opinion.financialpost.com/2014/03/18/jack-m-mintz-b-c-s-lng-tax-could-bomb/