10/21/2014 04:52 EDT | Updated 12/21/2014 05:59 EST

B.C. LNG tax rates lower than first promised

The tax framework for B.C. LNG was announced Tuesday, with rates lower than those tabled in February's budget.

Finance Minister Mike de Jong said the tax rate will start at 1.5 per cent and remain at that level while LNG (liquefied natural gas) plants are operating at a loss and capital investments are being recouped.

The rate will rise to 3.5 per cent after four years, where it will remain for another 20 years, when a final rate increase to five per cent will be instituted in 2037.

In February's budget, de Jong had tabled a two-tiered tax starting at 1.5 per cent for the first three years, eventually rising to seven per cent after five years.

Changes to the market since the budget are being blamed for the revised rate, with the province admitting that the declining price for LNG and increased construction costs mean reduced returns for investors. 

This means, de Jong said, a significant reduction in projected revenue for the province. Under the original seven per cent tax regime, the province says a medium-sized LNG facility would have brought in $1.5 billion in tax revenue over 10 years.

Under today's revised bill, that number would only be $800 million.

De Jong says "developing a tax framework for a promising new industry has been a complex process. We believe this overall framework strikes the right balance between a competitive economic environment and a fair return to British Columbians."

In an attempt to encourage investment, there will also be a new B.C. corporate income tax credit. It will reduce the provincial corporate income tax rate from 11 per cent to as low as eight per cent. The province says this framework is competitive with other jurisdictions, including the U.S and Australia.

Potential investors had been waiting on this tax announcement, expecting it to play a big role in determining whether B.C. LNG projects will go ahead.

There are currently 17 proposed terminals in the province by various investors but none have been given final board approval.

The CEO of one of the largest potential investors, Petronas, had threatened to halt his company's plans for a multi-billion-dollar facility if the tax regime is not favourable.

In a statement, LNG Canada said, "this is an important step forward in providing the certainty that companies need," but noted that there is more work to do before a final investment decision is made.

The new tax will apply to LNG for both domestic and foreign markets, and to the net income from the liquefaction of natural gas in the province. It is not a royalty or export tax.

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

By the numbers

- Initial LNG tax rate: 1.5 per cent while capital investment is being deducted.

- Tax at the 1.5 per cent rate is creditable against the higher tax rate.

- Tax rate on net income: 3.5 per cent once capital investments is deducted.

- Tax rate will increase to five per cent in 2037.

- Income tax credit reduces B.C. corporate income tax rate to eight per cent (from current 11 per cent).