Overview 2
2013: British Columbia Decided to Create an LNG Income Tax B.C. had little assured taxation revenue from an LNG industry. Royalties would only apply to the extraction volume of B.C. gas. BC Corporate Income Tax would only apply to entities with a fixed place of business in the Province. B.C. faces constitutional and trade agreement constraints. 3
2014 Market Overview: Economic Conditions Changing Outlook for declining LNG selling prices and expected increases in construction costs have reduced investor projected returns: LNG selling prices have declined More global LNG supply due to competition China s economic growth is slowing and China is acquiring natural gas from pipelines Japan is considering restarting its nuclear power program Oil prices are declining, reducing the value of oil-indexed contracts Potential purchasers are looking for Henry Hub based contracts Increasing Construction Costs Cost escalation in Australia has raised cost expectations in B.C. Competition for resources likely to increase cost 4
2014 Market Overview: Economic Conditions Changing Market projections have decreased LNG Price Spread to Henry Hub Based on U.S. Energy Information Administration (EIA) data Real $2013 / MMBtu 5
Illustrative LNG Income Tax The LNG Income Tax is a new income tax on taxpayers that have income derived from liquefaction activities at an LNG facility located in British Columbia. The LNG Income Tax is effective for taxation years starting on or after January 1, 2017. 6
LNG Income Tax Highlights Feature Description Effective Dates Effective for taxation years starting on or after January 1, 2017: 3.5% initial rate, 5% rate effective January 2037. 1.5% Minimum Tax 1.5% of Net Operating Income (revenue less expenses). Minimum tax is payable while operating losses and capital investment costs are being recovered. Net Operating Loss and Capital Investment Accounts Higher Tax Rate Costs incurred before start-up and cost of construction of the LNG Facility. Applies to Net Income (after net operating losses and capital investment accounts have been recovered). Credit for 1.5% Minimum Tax Credit for 1.5% tax pool is deductible from the 3.5% tax. 7
LNG Facility Lifecycle and LNG Income Tax Construction Operating losses and capital investment costs are accumulated during construction of the LNG Facility LNG Facility Start-up 1.5% tax takes effect Operating losses and capital investment costs are drawn down After Investment Deducted 3.5% tax takes effect Operating losses and capital investment costs have been fully deducted Credit for 1.5% tax 8
New B.C. Corporate Income Tax Natural Gas Credit Feature Natural Gas Credit for Corporate Income Tax Tax Credit Amount Maximum Tax Credit Tax Credit Carry Forward Description Available to LNG taxpayers that have a permanent establishment in British Columbia. Tax credit is equal to 0.5% of the cost of natural gas owned by the LNG taxpayer at the LNG facility inlet. Tax credit may reduce the effective BC Corporate Income Tax rate to a minimum 8% (from current 11% rate). Unused tax credits may be carried forward into future years. 9
LNG Income Tax as Presented with Budget 2014: At an LNG Facility Producing 12 Million Tonnes Per Annum $ Millions 300 250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Year LNG Tax Paid Eligible for Credit Credit for Prior LNG Tax Paid LNG Tax After Credit Applied Model only. 10
LNG Income Tax as Presented October 21, 2014: At an LNG Facility Producing 12 Million Tonnes Per Annum $ Millions 300 250 200 150 100 50 0 1 2 3 4 5 6 7 8 9 10 Year LNG Tax Paid Eligible for Credit Credit for Prior LNG Tax Paid LNG Tax After Credit Applied Model only. 11
Provincial Taxes and Royalties: For an LNG Facility Producing 12 Million Tonnes Per Annum $ Millions 1,200 1,000 800 600 400 200 0 Year Model only. -2-1 0 1 2 3 4 5 6 7 8 9 10 Construction Production 1.5% Rate Production 3.5% Rate (Net of LNG Tax Credit) Other Taxes Royalties Carbon Tax LNG Income Tax 12
Competitive Tax Regime for LNG Development Aggregate Taxes and Royalties*; (Real $2012; 82 MTPA Production; 20 Years of Operations) 400 350 300 LOW PRICE SCENARIO HIGH PRICE SCENARIO $ Billions 250 200 150 100 50 0 B.C. February 2014 B.C. October 2014 AUSTRALIA ALASKA GEORGIA LOUISIANA OREGON TEXAS *TAXES AND ROYALTIES FROM THE FISCAL FRAMEWORK IN EACH JURISDICTION ACROSS FEDERAL, PROVINCIAL/STATE, AND LOCAL/MUNICIPAL GOVERNMENT. SOURCE FOR ALL EXCEPT B.C. OCTOBER: ERNST & YOUNG 2014 REPORT, POTENTIAL TAX REVENUES FROM APPLYING SELECTED U.S. FEDERAL, STATE AND LOCAL TAXES TO LNG DEVELOPMENT IN B.C. B.C. OCTOBER 2014 NUMBERS CALCULATED USING ERNST & YOUNG ASSUMPTIONS FROM FEBRUARY 2014. B.C. February 2014 and other jurisdictions are as published in Budget 2014. B.C. October 2014 reflects tax rates as presented to the legislature on Oct. 21, 2014. Model only. Not intended as a revenue forecast. 13
What s New Since Budget 2014? Item Budget 2014 October 2014 Comment LNG Income Tax Rate Up to 7% 3.5% The LNG Income Tax rate is 3.5%, increasing to 5.0% in 2037. No change in the 1.5% rate Effective Date N/A Effective for taxation years starting on or after January 1, 2017 LNG Facility Pre-construction costs N/A Eligible LNG costs incurred prior to construction may be included as capital investment or operating losses as applicable Investment Allowance N/A Prescribed rate The investment allowance is an amount calculated using a prescribed rate that is applied to 75% of tangible capital property Plant Closure Credit N/A 5% Costs related to reclamation, remediation and restoration of an LNG facility site will be eligible for a tax credit BC Corporate Income Tax Natural Gas Credit N/A 0.5% of the cost of natural gas at the LNG Facility inlet The natural gas tax credit may reduce the effective BC Corporate Income Tax rate to 8% 14
LNG Taxation Framework Design 1. Fair return to British Columbians. 2. B.C. is a competitive jurisdiction. 3. Legislative framework for the tax in place provides certainty for proponents. 4. Tax design takes into consideration the results of consultations with proponents. 15