On October 21, 2014, the province of British Columbia introduced legislation for the taxation of income from liquefied natural gas (LNG) activities in BC. This update briefly summarizes some of the key features of the newly proposed legislation.
In February 2013, British Columbia first announced an intention to establish the British Columbia Prosperity Fund to secure benefits from BC's abundant supply of natural resources, including from LNG activities in BC. With the release of the province's budget on February 18, 2014, the government proposed a general framework for an LNG fiscal regime, but a final decision on its implementation and details was postponed until this fall.
The general framework released with the February budget contemplated a two-tier tax plan with the Tier 1 rate of 1.5% for the first three years after commencement of commercial production and the Tier 2 rate of up to 7%. Since February, the government has consulted industry proponents on the proposals with the goal of finding a balance between attracting investment and raising revenue.
The LNG income tax
On October 21, 2014, the BC government introduced the Liquefied Natural Gas Income Tax Act (the Act), with tax rates lower than those tabled in the February budget. Although the Act is not currently in force, media reports indicate it is expected to be passed before the end of the year. Once enacted, the Act will apply to taxation years beginning on or after January 1, 2017.
The LNG tax will apply on income generated from "liquefaction activities" carried out at, or in respect of, LNG facilities located within British Columbia. Under the Act, liquefaction activities encompass a wide variety of activities, including operating an LNG facility, acquiring or owning an LNG facility, and the sale of natural gas or LNG at an LNG facility. The LNG tax will apply on a facility-by-facility basis, so that a taxpayer must pay the tax separately in respect of each LNG facility at which liquefaction activities are carried out. This tax will apply to LNG facilities located in the province, regardless of whether the LNG is exported to foreign markets or used domestically.
Regardless if the person is resident in BC, the LNG tax is payable by any person (including a corporation, a trust, an individual or a partner of a partnership) that has income derived from liquefaction activities in British Columbia. For LNG tax purposes, only the income or loss derived from liquefaction activities in BC is relevant. The LNG tax is in addition to income taxes imposed by the federal and provincial governments.
The LNG tax is computed as follows:
- A Tier 1 tax rate of 1.5% on "net operating income" from liquefaction activities, which can be deducted from the Tier 2 tax.
- A Tier 2 tax rate of 3.5% on "net income" from liquefaction activities for taxation years beginning after December 31, 2016, with the rate increasing to 5% for taxation years beginning after December 31, 2036.
The Tier 1 tax paid can be used to reduce Tier 2 tax. As a result, during the period when net operating losses and capital investment costs are being recovered, a taxpayer will pay a minimum tax of 1.5%. Once the net operating losses and capital investment costs are recovered, the higher rate will be payable.
Net operating income and net income for purposes of the Act are calculated similar to the concept under federal income tax legislation relating to the computation of taxable income, with some important distinctions. For example, net operating income from liquefaction activities specifically excludes recaptured capital cost allowance and hedging gains and losses, and no deductions are permitted for capital cost allowance or financing charges such as interest. A deduction from net operating income is allowed for an investment allowance (as calculated under the Act).
Net income, which is the amount on which the Tier 2 tax is payable, is the total of the net operating income less the net operating losses (which consist of the accumulated net operating losses from prior years) and the capital investment account (which consists of the costs associated with constructing an LNG facility).
Other features of the proposed LNG fiscal regime include:
- Specific rules relating to the deemed sale and purchase of commodities at the LNG facility, the valuation of natural gas at the LNG inlet and the valuation of LNG, natural gas and natural gas liquids that are sold to a non-arm's length person.
- Expenditures relating to the reclamation, remediation and restoration of an LNG facility are eligible for a 5% tax credit.
- The introduction of a new natural gas corporate income tax credit under the British Columbia Income Tax Act. This credit will equal 0.5% of the cost of natural gas acquired at the inlet to an LNG facility and will be available to a person that is subject to the LNG tax and has a permanent establishment in British Columbia. The credit can be used to reduce the corporate income tax rate to a minimum of 8% (from the current 11%) and unused tax credits may be carried forward.
Readers should note that the legislation summarized above is subject to the approval of the British Columbia legislature. Further information and updates may be found here.
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