Canadian Developments in Oil and Gas Taxation

Transcription

1 Canadian Developments in Oil and Gas Taxation Jim Greene Tax Policy Branch OECD Workshop - November 18-19, 2010

2 Outline Oil and gas federal and provincial roles Corporate tax treatment of oil and gas production and past reforms Oil sands and accelerated CCA Approaches to estimating cost of accelerated deductions/tax deferrals 2

3 Jurisdiction over Oil and Gas Canada has a federal system of government Provinces generally have ownership/control of natural resources - Exception for offshore resources and 2 of 3 northern territories, where there is a federal role With respect to production of oil and gas: - Federal government levies corporate income tax - Provinces levy corporate income tax royalties bonus bids on leases, rentals, etc. 3

4 Oil and Gas Production Production and Royalties - Canada MBOE 1, Territories British Columbia Alberta Saskatchewan Atlantic Provinces Rest of Canada 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Oil Production Natural Gas Marketable Production Royalties $M Source: National Energy Board, Canadian Association of Petroleum Producers Royalties ($M) 4

5 Oil and Gas Royalties As resource owners, provinces levy royalties on oil and natural gas production Structures and rates vary across jurisdictions and resources Conventional oil and gas royalties generally a percentage of value of production - Rate determined by a formula typically sensitive to price, well productivity and sometimes well vintage Royalties for offshore, oil sands, and some less conventional onshore resources have a multi-tier structure. Typical: - 1st tier based on gross revenue - 2nd tier based on net revenue 5

6 Corporate Income Tax Rates Common federal income tax rate for all sectors (including oil and gas) since 2007 Federal rate = 18% in Will decrease to 16.5% as of 2011 and 15% as of 2012 Provincial rates in 2010 range from 10% (Alberta) to 16% (PEI and Nova Scotia) - Weighted average is 11.5% - Provincial tax bases same as or similar to federal base Federal goal is 25% combined federal + provincial rate 6

7 Corporate Income Tax Base Corporate income tax levied on: - Current revenue + net capital gains (50% inclusion) - Less: operating expenses, capital depreciation and interest cost Capital cost allowances (CCA) based on prescribed rates generally based on useful life of assets Operating losses - Carry forward 20 years, carry back 3 years - Limited loss transfer between related entities Targeted provisions for some investments/sectors - Small business, R&D, resource extraction, etc. 7

8 Corporate Income Tax Royalty Costs Provincial levies other than income taxes (e.g. capital, payroll and property taxes) are deductible for federal CIT purposes as a current business expense Traditionally, royalties deductible also Royalties made non-deductible Resource Allowance introduced as proxy for royalty costs Deduction equal to 25% of resource profits ; intended as a ceiling Over time, came to exceed royalties in some cases; acted as a floor Resource Allowance phased-out and royalty deductibility phased-in to ensure deduction only for actual royalty costs - Syncrude Remission Order (1976) allowed deductibility of both royalties and resource allowance for this early oil sands project order expired

9 CIT - Oil and Gas Capital Costs Tangible Capital Costs - 25% per year (declining balance basis) capital cost allowance (CCA) for most resource extraction equipment Intangible Capital Costs - Exploration Expenses (CEE) e.g. seismic surveys & drilling exploratory wells 100% - Development Expenses (CDE) e.g. drilling production wells 30% per year - Oil and Gas Property Expenses (COGPE) e.g. resource leases 10% per year - Flow-through shares allow non-taxable companies to transfer exploration and development expenses to investors - Former earned depletion deduction eliminated 1990 Deduction on account of exploration and development costs that supplemented deduction for actual costs 9

10 Policy Direction Rationalization of resource measures: - Elimination of earned depletion, resource allowance, and Syncrude Remission Order Level the playing field by extending similar provisions to renewable energy production : - accelerated capital cost allowance for renewable energy generation equipment (wind, solar, geothermal, tidal, etc.) Class 43.2 (50%) - flow-through shares for project start-up expenses 10

11 Oil Sands - The Resource Oil sand is a mixture of sand, clay, water and bitumen a highly viscous heavy petroleum Located in three major areas in northeast Alberta Production: - Doesn t flow naturally to a well - Can be mined from open pits (if less than ~70 meters deep), or extracted in situ using horizontal stimulated wells (deeper deposits) - Processing required to separate bitumen and sand - Bitumen must be upgraded before being refined into fuel 170 billion barrels of proven reserves 11

12 Oil Sands - History 1967: GCOS mining operations began 1972: accelerated capital cost allowance for mines (including oil sands mines) 1978: Syncrude mining operation began, with partial government ownership eventually divested 1985: first in situ production 1996: accelerated capital cost allowance extended to in situ 1997: Alberta introduces generic royalty regime 2007: federal phase-out of accelerated CCA ( ) announced 2007: new Alberta royalty framework announced (effective 2009) projects 12

13 Oil Sands Capex, Production $ M 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Capital Expenditures in the Oil Sands Source: Canadian Association of Petroleum Producers June 2010 Forecast by Canadian Association of Petroleum Producers 13

14 Accelerated CCA - General Canadian capital cost allowance (CCA) regime - cost of assets deducted at a fixed rate generally reflecting useful life of assets of that type - Matches costs with revenues they help create Faster rates ( accelerated CCA ) result in higher deductions in early years of an investment; lower deductions later Resulting deferral of tax improves rate of return Accelerated CCA used to encourage investment in various contexts: - Assets used in research and development - Clean energy generation equipment - Manufacturing and processing equipment (temporary ) - Mining assets - Oil sands assets 14

15 Accelerated CCA for Oil Sands - Description Regular CCA rate for resource extraction equipment is 25% Accelerated CCA available since 1972 for new mines (including oil sands mines) and major mine expansions Expanded to in situ oil sands projects in 1996 Additional allowance/deduction supplementing regular CCA deduction - up to remaining undepreciated cost, not exceeding taxpayer s income from the project for the year i.e. project ``ring-fenced`` Effectively defers tax until cost of capital assets recovered out of project earnings Intended to helped reduce risk associated with early investments in a novel resource 15

16 Accelerated CCA for Oil Sands Phase-out Phase-out of accelerated CCA for oil sands announced in Budget Special incentive no longer required given maturity of sector technological advancements, improved economics, self-sustaining investment and environmental considerations - Improve neutrality between oil sands and other sectors To provide investment stability given long project timelines, accelerated CCA grandfathered for assets - acquired before March 19, 2007 announcement; or - acquired before 2012 that are part of a project phase on which major construction began before March 19, 2007 For other assets, accelerated allowance will be phased down over 2011 to 2015: Year Allowable Percentage of Additional Allowance Draft amendments to implement the phase-out released for comment on May 3,

17 Accelerated CCA for Oil Sands Revenue Cost Revenue cost of accelerated CCA (limited to project income) complex to determine in this context - Depends on project-specific factors such as timing and quantum of investment, production and profitability, which are difficult to forecast, as well as broader factors like oil prices and input costs - Can vary considerably year to year based on mix and size of projects, and position of each project within its investment life cycle Forecast to average $300M annually on a nominal cash-flow basis for (about 0.02% of GDP) 17

18 Estimating Cost of Accelerated Deductions / Tax Deferrals Estimating tax expenditure associated with accelerated deductions / tax deferrals has particular challenges Two approaches examine impact from different perspectives - Current cash-flow approach measures impact on taxes in a particular year Important for short-term government budgeting purposes - Present-value approach forecasts impact over a number of years of an investment or group of investments made in one period Estimates time value benefit provided to an investment or group of investments 18

19 Cash-Flow Approach Single Investment Tax expenditure = difference in a year between tax value of deduction at accelerated rate and deduction at benchmark rate. Early years, deduction under accelerated rate higher than under benchmark positive tax expenditure Later years, deduction under accelerated rate lower than under benchmark negative tax expenditure Sum of annual tax expenditures = 0 *Simplified example: investment of $1000 in Year 1, tax rate of 10%, benchmark depreciation rate of 20%, accelerated depreciation rate of 50% (both declining balance) and no reduction in 1st year deduction Tax Value of Deductions - Current Cash-flow Basis Benchmark Rate Accelerated Rate Tax Expenditure 19

20 Cash-Flow Estimate - Aggregate Aggregate tax expenditure on many investments Net tax expenditure in a year = taxes deferred on investment in current and recent years less recoveries of taxes deferred on investments in earlier years Focus on current year revenue impacts Result dependent on: - Projected investment profile - Time at which estimate is made $ Simplified example: investment of $1000 each year, tax rate of 10%, benchmark rate of 20%, accelerated rate of 50% (both declining balance). Tax expenditure in respect of each year's investment in a different colour Aggregate Tax Expenditure 20

21 Cash Flow Tax Expenditure Varies with Investment Profile Same assumptions as previous examples; only change is investment profile - Investment profile and maturity of measure are key determinants of tax expenditure Aggregate Tax Expenditure - Growing Investment Investment Tax Expenditure 7, , , , , ,000 1, Aggregate Tax Expenditure - Stable Investment Investment Tax Expenditure 1, , Investment 1,200 Aggregate Tax Expenditure - Declining Investment 1, Tax Expenditure

22 Present Value Approach Present value of annual cash-flow tax expenditures (pos. and neg.) over the life of an investment or group of investments Forward looking a forecast Single investment (e.g. firm perspective): NPV of tax deferral over the life of particular investment Aggregate (e.g. government perspective): NPV of positive and negative tax expenditures resulting from investments made in a particular year Private and public discount rates may differ Simplified example: investment of $1000, tax rate of 10%, benchmark depreciation rate of 20%, accelerated rate of 50% (both declining balance) Tax Value of Accelerated Deduction - Single Investment NPV (8%) of tax expenditures = $ Benchmark Rate Accelerated Rate Tax Expenditure 22

23 Present Value Approach - Uplift NPV of a tax expenditure for capital investment can be used to calculate the fiscal uplift: Uplift = NPV of tax expenditure NPV of capital investment Previous example would be $19.76 / $1,000 = 0.2% Measure of level of fiscal support relative to the size of the investment i.e. tax support is equivalent to an upfront grant of X% Facilitates comparison across projects and incentives 23

24 Thank you Canadian Developments in Oil and Gas Taxation Jim Greene Senior Chief Resource and Environmental Taxation Business Income Tax Division Tax Policy Branch Finance Canada 24