B.C. Tax Competitiveness Expert Panel on Tax Province of British Columbia
Introduction The Canadian Association of Petroleum Producers (CAPP) is the voice of Canada s upstream petroleum industry, representing companies that explore for, develop and produce more than 90 per cent of Canada s natural gas and crude oil. We are a national industry with revenues of about $100 billion per year. Canadian natural gas faces a challenging business environment and a difficult regulatory review process for new projects. Strong and growing U.S. shale gas developments have weakened demand for Canadian gas and led to low commodity prices. Natural gas drilling activity across the country has declined and Canada s share of the North American natural gas market has decreased significantly over the past few years. Producers are responding to these challenges by reducing costs, developing new markets (both domestic and export) and endeavoring to reduce the costs of transportation to markets. With a significant economic presence in British Columbia and with projected investment of $6 billion this year, natural gas producers have a keen interest in ensuring the Province maintains a strong and competitive business investment climate. Our recommendations below can help ensure a vibrant industry with significant job creation and government revenue generation for decades to come. Growing British Columbia s Economy British Columbia continues to develop its economic future by diversifying its export markets and growing its economic ties to Asia. This has produced strong export revenue growth in sectors such as softwood lumber exports to China, which have helped strengthen the provincial economy. However, the very uncertain economic outlook in the U.S., Europe and other regions threatens the near and long-term outlook for B.C. B.C. needs to ensure a strong investment climate that will create jobs now and into the future. The Government of B.C. has taken steps over a number of years to advance this goal. Business tax reforms, including reducing the corporate income tax rate and eliminating the capital tax, have all set the right fiscal conditions for business in BC to grow and be competitive throughout the province, nationally and around the world. For the upstream petroleum industry the Government has ensured a competitive royalty structure to encourage development and growth. Improvements to the royalty regime for deep gas and introduction of the Net Profits Interest (NPI) royalty for development of unconventional and remote natural gas have been good steps to help grow natural gas development, but there is more that needs to be done. 1
BC is the second largest producer of natural gas in Canada. The industry typically spends more on capital investment in BC than in any other Canadian province or territory outside Alberta. This year the industry will invest $6 billion in exploration and development. This has kept unemployment rates in Northeast BC, where industry activity is most focused, well below the provincial average (3.7 per cent in February, 2012 versus 7.4 per cent for the province). Including Crown royalties, revenues from natural resources were $1.2 billion in fiscal year 2010-11. Over the next 25 years, the Canadian Energy Research Institute estimates that, with the right combination of fiscal and market conditions, the natural gas industry could contribute $522 billion to the provincial economy, create 2.6 million person years of employment and generate billions of dollars in BC Government revenues. These prospects align well with the BC Jobs Plan, which acknowledges natural gas as one of the key sectors for investment and jobs growth. While BC natural gas has been a strong and significant contributor to the economy and has tremendous potential for decades to come, it has been subject to the same economic challenges facing all Canadian gas. By contrast to 2008-09 when royalty revenues from natural gas were $1.3 billion, royalty revenues were only $313 million in fiscal year 2010-11. Land sales in 2011 were the lowest of the three western provinces at $223 million. New energy export potential lies in the growing economies of China, India and other parts of Asia. It is critical for Canadian producers to participate in this tremendous export growth market, even though it will take time to develop the necessary infrastructure and export capacity. Canadian Natural Gas Production Landlocked and Losing Market Share While world demand is strong, in recent years the Canadian natural gas producing sector has faced growing challenges in both export demand and netback prices. Canada s only current export customer for natural gas, the U.S., has been increasing its domestic supplies of natural gas, including those closer to the large consuming markets on the U.S. Eastern Seaboard. Technological advances in recent years, notably horizontal drilling and fracturing technology, have made shale gas development economic. Combined with the reduced demand arising from the economic downturn, this has led to a sustained period of low natural gas prices continent-wide, and even lower netbacks to Canadian producers further removed from consuming markets. Unconventional Natural Gas Basins US Basins much closer to Consuming Markets Canada Losing Market Share Canadian Share of North American Natural Gas Production 30 % of North American production Market share down 3% since Recession start mid-2008 25 20 NEB 15 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Source: US - EIA, Canada - IHS Energy The North American market is essentially landlocked, particularly as it applies to natural gas export capacity. While U.S. demand for Canadian natural gas continues to decline there is currently no access to any other export markets. Infrastructure investment is required, but it will take time to access lucrative Asian markets. These alternative markets could provide both an additional outlet for Canadian production and potential price uplift. Global markets are now paying $10.00 - $16.00 per thousand cubic feet of natural gas, while Canadian producers face much lower netbacks now less than $3.00 from North American markets. While transportation, liquefaction and regasification costs significantly reduce the netbacks from potential LNG exports, this price differential results in an ongoing loss in producer revenues, provincial royalties, and federal corporate income taxes. Canadian producers have a real opportunity to capitalize on the energy demand in Asian markets via 2
exports from our west coast. Canada s fiscal and regulatory competitiveness will be an important factor in realizing this market opportunity. In the meantime, Canadian natural gas continues to lose its share of the North American market. From a high of almost 28 per cent in 2005, our market-share now has dropped to 19 per cent. Absent action by producers and by governments through policy changes, it may well continue to decline. Over three percentage points have been lost since the economic downturn began in 2008, when CAPP first highlighted to the federal Finance Committee the threat to Canadian natural gas producers. This loss of market share has seen a drop in natural gas export revenues from $35 billion in 2005 down to $13 billion in 2011. The risk for both the Canadian natural gas industry and the economy is that investment decisions for largescale shale gas developments will continue to be made in favour of U.S. investment. This impacts both the level of investment and resulting economic benefits to the Canadian economy, and the skills, expertise and services infrastructure resident in the sector. The threat to Canada s future share of the continental market has been confirmed by the US Energy Information Administration s (EIA) 2011 annual energy outlook. The EIA forecasts the U.S. will need less and less Canadian natural gas over the next 25 years, with exports to the U.S. potentially declining by as much as 2.7 bcf/d by 2035. That represents another loss of 17 per cent of today s Canadian gas market. Because of growing U.S. self-sufficiency, the EIA forecasts Canada as the only producing area in the world with decreasing production. This highlights the need for a focused, integrated and strategic response to sustain investment, jobs and benefits in Canada. Tax Competitiveness Recommendations for British Columbia In focusing on economic development and being responsive to the needs and suggestions of the business community, the Government of BC is generally on the right track and should stay the course. Our suggestions are meant to enhance the Province s investment friendly attitude and competitiveness. To ensure a vibrant and growing natural gas sector in British Columbia, CAPP recommends the following: Retain the current Corporate Income Tax rate of 10 per cent; To the greatest extent possible, streamline and minimize the cost to business of the reversion of the HST to the previous provincial sales tax; Incorporate property tax rate linkages across the province to promote economic certainty and competitiveness for new investments; and Reframe from expanding the current scope and magnitude of the carbon tax and engage stakeholders in discussions on its future. Corporate Income Tax Rate With B.C. s corporate income tax rate (CIT) now at 10 per cent, the province is in a very competitive position compared to other jurisdictions in Canada for attracting both domestic and international investment capital. The province has spent many years achieving this position by steadily reducing the CIT and eliminating the capital tax. The provisional one percentage point increase to the CIT announced in Budget 2012, to be revisited in Budget 2013 and only enacted should economic circumstances worsen from the Budget projections, is one B.C. needs to contemplate with deep reflection. While CAPP agrees with the sentiment to balance the budget, ensuring that investment capital continues to be attracted to the province is the best means of promoting a growing economy one which will grow the tax base and increase tax revenues without increasing the tax rate. CAPP recommends maintaining the corporate income tax rate at 10 per cent. 3
Reverting Back from HST to PST Finance Minister and Deputy Premier Kevin Falcon has stated that the previous combined 12 per cent Provincial Sales Tax (PST) and federal Goods and Services Tax (GST) will be reinstated, with all permanent PST exemptions, to replace the current Harmonized Sales Tax (HST). Despite the disappointment of the Province replacing a more efficient and investment-encouraging Value-Added Tax (VAT) with a less attractive and less competitive consumption tax, CAPP has made several suggestions to B.C. Finance to help smooth the transition. Our submission to the Tax Policy Branch, dated November 11, 2011 and attached to this submission for reference, contains several suggestions for improving the PST s administration. Our recommendations include comment on the following and other areas: Effective Date Tax Rate PST Registration Reporting Period Tax Paid in Error Tax Court Appeals Tax Paid Assets Partnerships Input Tax Credit Claims Time Limits Transitional Rules Purchase Exemption Certificates Etc. CAPP is willing to discuss any of these suggestions in greater detail at Finance s or the Panel s request. Municipal Property Taxation CAPP s suggestions for improving the contribution of municipal property taxation to business competitiveness take into account the principles of fairness, equitable treatment across industries and certainty against arbitrary or unreasonable future tax increases. Export Terminals To continue diversifying the Province s export markets industry is pursuing a number of liquefied natural gas (LNG) projects on the west coast, to access Asian export markets for B.C. natural gas. Budget 2012 stated that the Municipal Port Property Tax Rate cap would be kept at $27.50 per $1000 of assessed property value until 2018, for existing property. It also incorporated a $22.50 per $1000 cap for new investment constructed before 2018. This will be a positive step in helping new LNG facilities. For future development of oil and/or refined products exports, the Ports Property Tax Act (PPTA) specifically exempts property that is used to transport crude oil or petroleum fuel products, or products from an industrial production or processing facility from the eligible tax cap. This exemption is discriminatory against one category of export product compared to all others. CAPP recommends the exemption be lifted. Mill Rates In order to maintain the competitiveness of the property tax system in B.C., CAPP advocates a linkage between industrial and residential mill rates. This ensures a level of certainty in the direction of future rates and confidence in the economics of new investment projects. As an example, the Northern Rockies Regional District has an Industrial-to-Residential mill rate ratio of 3.3 to 1. This type of rates linkage province-wide, without necessarily having the exact same ratio, would contribute to overall certainty and competitiveness. 4
Assessment Process and Education Tax Rate CAPP views the property assessment process in B.C. very favorably and has no real concerns. Industry is comfortable with the established collaborative, fair and open process, one that we view as working very well. On the education tax rate, the current 60 per cent reduction for industrial property in Class 4/5 has been a good contributor increasing industry activity in B.C. and should be kept. Municipal Budgeting There are often competing objectives between municipal spending initiatives and the desire to restrain increases to funding requirements. This may be an area where provincial oversight or spending framework could provide both municipalities and property tax payers with more certainty around current and future property taxes. In this regard, CAPP supports Bill 20 2011 Auditor General for Local Government Act (AGLG). With the AGLG s role designed to maximize value for money by enabling the AGLG to undertake performance audits and provide information to assist local governments in choosing how best to respond to their communities priorities, this could be a very positive step in the right direction and a model for better practices in other provinces. Carbon Tax CAPP is on record with the B.C. government as supporting the concept of a broad-based carbon price. However, CAPP does not support either a scope expansion of the tax to cover process emissions or further potential increases beyond the legislated $30 per tonne, set to occur this July. The tax s impact on energy intensive trade exposed (EITE) sectors creates competitiveness challenges for the province s natural gas producing sector, as it competes directly with production from jurisdictions where the carbon burden is absent. The current low natural gas price environment and surplus of North American gas supplies also create near-term challenges as producers decide whether to respond to oversupplies and minimize both costs and taxes by curtailing production and delaying new projects. CAPP looks forward to participating fully in the carbon tax review announced in the 2012 provincial budget. Summary and Conclusion The natural gas industry in British Columbia has been a significant contributor to the provincial economy, investing billions of dollars annually, creating jobs and generating significant government revenues. The resource is abundant and it represents tremendous economic potential for the province for decades to come. However, like the rest of the Canadian natural gas industry, it faces declining exports to the U.S. because of growing shale gas development south of the border. While producers continue to reduce costs and increase productivity, the industry is pursuing natural gas market growth opportunities in electricity generation and heavy vehicle transportation. In addition, current discussions with the Province and the federal government to approve new infrastructure to the BC west coast and access lucrative Asian markets will build on the Province s growing export diversification in other sectors. To help ensure a healthy and growing natural gas industry, CAPP makes the following recommendations to the Expert Panel on Tax: Retain the current Corporate Income Tax rate of 10 per cent; To the greatest extent possible, streamline and minimize the cost to business of the reversion of the HST to the previous provincial sales tax; 5
Incorporate property tax rate linkages across the province to promote economic certainty and competitiveness for new investments; and Reframe from expanding the current scope and magnitude of the carbon tax and engage stakeholders in discussions on its future. 6