Measuring Effective Tax Rates for Oil and Gas in Canada
DOI:
https://doi.org/10.11575/sppp.v3i0.42336Abstract
The purpose of this report is to provide cost of capital formulae for assessing the effects of taxation on the incentive to invest in oil and gas industries in Canada.
The analysis is based on the assumption that businesses invest in capital until the after-tax rate of return on capital is equal to the tax-adjusted cost of capital. The cost of capital in absence of taxation is the inflation-adjusted cost of finance. The after-tax rate of return on capital is the annualized profit earned on a project net of the taxes paid by the businesses. For this purpose, we include corporate income, sales and other capital-related taxes as applied to oil and gas investments.
For oil and gas taxation, it is necessary to account for royalties in a special way. Royalties are payment made by businesses for the right to extract oil and gas from land owned by the property holder. The land is owned by the province so the royalties are a rental payment for the benefit received from extracting the product from provincial lands. Thus, provincial royalty payments are a cost to oil and gas companies for using public property.
However, since the provincial government is responsible for the royalty regime and could use taxes like the corporate income tax to extract revenue, one might think of royalties as part of the overall fiscal regime to raise revenue. In principle, one should subtract the rental benefit received from oil and gas businesses from taxes and royalty payments to assess the overall fiscal impact. This is impossible to do without measuring some explicit rental rate for use of provincial property. Further, royalty payments may distort economic decisions unlike a payment based on the economic rents earned on oil and gas projects. Instead, for comparability across jurisdictions, one might calculate the aggregate tax and royalty effective tax rates (such as between Alberta and Texas).
References
Boadway, Robin, Neil Bruce and Jack Mintz [1982] “Corporate Taxation and the Cost of Holding Inventories”, with R. Boadway and N. Bruce, Canadian Journal of Economics, May 1982, 278-93.
Boadway, Robin, Neil Bruce and Jack Mintz [1984] “Taxation, Inflation and the Effective Marginal Tax Rate on Capital in Canada,” Canadian Journal of Economics, 1984, 17 (1), 62-79.
Boadway, Robin, Neil Bruce, Kenneth McKenzie and Jack Mintz, “The Effective Tax Rates on Mining Industries,” Canadian Journal of Economics, February 1987, 1-17.
Mackie-Mason, Jeffrey and Jack Mintz [1991] “Corporate Taxation and the Building of Capital: Implications for Expensing and Capitalization of Costs”, mimeograph, University of Toronto.
McKenzie, Kenneth J., Mario Mansour and Ariane Brûlé [1997], “The Calculation of Marginal Effective Tax Rates”, Working Paper 1997-15, Finance Canada, Ottawa.
Mintz, Jack M. {1990], “Tax Holidays and Investment,” World Bank Economic Review, 4, No. 1, 1990, 81-102.
Mintz, Jack M. [1995], “Tax Holidays and Investment,”in Fiscal Incentives for Investment and Innovation, ed. by A. Shah, Oxford University Press, 1995, pp. 165-194.
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