October 21, 2014 / 9:56 PM / in 3 years

British Columbia sets new LNG income tax at 3.5 percent

VICTORIA B.C. (Reuters) - British Columbia unveiled its long-awaited liquefied natural gas tax legislation on Tuesday, setting out a preliminary top rate of 3.5 percent, which the Canadian province said adds up to the most competitive total tax regime of any Western jurisdiction.

The new tax, which applies to income from the liquefaction of natural gas, will rise to 5 percent in 2037, giving the nascent industry a two decade break period to establish itself in the Pacific Coast province.

At 3.5 percent, the top rate is half the 7 percent proposed by the province earlier this year. Industry had criticized that rate as too high, saying it could jeopardize the viability of LNG export facilities planned for the province.

“We have been aware, from the outset, that we are being analyzed on a comparative basis with other jurisdictions,” British Columbia Finance Minister Michael de Jong told reporters. “We believe, based on the analysis we’ve done ... that we represent the single most cost-competitive jurisdiction within which these proponents can establish themselves.”

The province’s analysis is based on Canada’s total tax regime, including other levies from all levels of government, royalties, carbon taxes and fees, compared with the total taxation regimes in Australia and the United States.

The tax details should provide some much needed clarity for companies such as Malaysia’s Petronas [PETR.UL], which warned earlier this month it could delay its $11 billion project by more than a decade unless a favorable tax deal was reached.

A spokesman for the state-owned company’s Canadian project said it continues to review the details of the new tax.

LNG Canada, a Royal Dutch Shell led consortium, was more overtly positive on the tax legislation, calling it an “important step forward in providing the certainty that companies need” in a statement.

More than a dozen LNG terminals are proposed for British Columbia’s rugged coastline, with major players including Petronas, Shell and Chevron all racing to build capacity to ship Canadian gas to Asian markets.

None of the projects have board approval, with the details of the LNG tax often cited as a hurdle to overcome for those multibillion-dollar investments. The Canadian projects are also facing fierce competition from new developments in Australia and the United States, which are more established jurisdictions.

The two-tier tax will apply at a lower rate of 1.5 percent at the start of operations until proponents recoup capital costs and initial net operating losses.

The province also introduced a new corporate tax credit for companies that have corporate offices in British Columbia, which will help offset the LNG tax.

De Jong said it the lower tax rate reflects a decline in LNG pricing forecasts and reduced demand from key markets in China and Japan.

“There’s no question the market has changed,” he said. “But we’re still in a range where this is viable and potentially lucrative for all that are involved.”

The legislation is expected to pass before the end of November.

Reporting by Julie Gordon; Editing by Grant McCool, Bernard Orr

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