Tax Insights: British Columbia unveils its liquefied natural gas (LNG) tax

Issue 2014-13

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In brief

Today, British Columbia’s budget unveiled its much-anticipated liquefied natural gas (LNG) tax regime. In essence, the province intends to introduce later this year a two-tier income tax, as follows:

  • Tier 1 tax rate of 1.5%
  • Tier 2 tax rate of up to 7% (the final rate will be determined and confirmed in the legislation)

The LNG income tax will apply to income from liquefaction of natural gas at LNG facilities situated in British Columbia.

In detail

Background

To stay competitive in global markets, the British Columbia government has reviewed the tax and royalty regimes of jurisdictions such as Australia and five US states – Alaska, Georgia, Louisiana, Oregon and Texas.

Two-tier income tax

The two-tier tax will operate as follows:

  • The Tier 1 tax rate of 1.5% applies to an operator’s net proceeds (revenue less expenses) after commercial production begins. The Tier 1 tax that has been paid can be deducted from the Tier 2 tax.
  • Net income for purposes of the Tier 2 tax will be net proceeds less up to 100% of the capital investment account. The Tier 2 tax rate will not apply until the capital investment account is depleted.

Capital investment account

The capital investment account comprises all costs associated with constructing an LNG facility, i.e. a plant that is built to liquefy natural gas. It typically includes gas purification and liquefaction systems, together with storage tanks and marine loading systems.

An LNG facility may also include support functions for the liquefaction process such as control rooms, material and equipment warehousing, maintenance shops and infrastructure facilities.

Calculating the LNG income tax

To illustrate how the proposed LNG income tax works, assume:

  • a new LNG plant in British Columbia produces LNG and earns constant profits over the years of commercial production
  • commercial production of LNG begins in year 1
  • for the first three years, only the Tier 1 tax rate applies

Because the producer has not deducted all its capital account until the end of year 4, the Tier 2 tax rate will apply starting year 4.

The Tier 1 tax paid during the first three years can be used as a credit to reduce the Tier 2 tax in year 4 and later years. Once the tax credits for taxes paid in earlier years have been fully used, the full Tier 2 tax will be in effect.

Income subject to the LNG income tax

The following types of income generated from the liquefaction of natural gas will be subject to the LNG income tax:

  • sale of liquefied natural gas
  • rents and fees payable for the use of a LNG facility
  • fees for processing natural gas at a LNG facility

Who will pay the LNG income tax?

The LNG income tax will apply to all LNG facilities in the province, regardless of whether the LNG is exported or used domestically.

Detailed legislation for the LNG income tax

A review of the Tier 2 tax rate and specific tax features will continue until the legislation is introduced, which is expected to occur in the fall of 2014.

The province plans to introduce the remaining legislative components, such as administration and enforcement, in 2015.

The takeway

PwC’s LNG team can help your organization:

  • apply these new measures in your financial models
  • comply with British Columbia’s tax legislation

For more information on the LNG industry, see PwC’s publication, ‘Investing in the growth of Canada’s LNG market’ at www.pwc.com/ca/energy.