Canadian oil and gas production firms will lose tax advantages that give them an edge at attracting investment over rivals in the United States under reform plans evolving in Washington, DC, predicted an academic accounting scorecard.
"Investing in American oil might soon look more compelling than investing in Canadian oil," said a comparison of combined federal, provincial and state levies done for the University of Calgary's public policy school.
While reforms sponsored by President Trump and congressional Republicans differ in detail, both have the same effect from a Canadian point of view: U.S. companies keep more profits, said the study.
"Either one, or even a hybrid version of the two, would make tax and royalty effective rates on new investment in the U.S. oil industry significantly more attractive," wrote economists Daria Crisan and Jack Mintz in the scorecard summary. Mintz has a long list of scholarly, government and business credentials including a seat on the board of directors at Imperial Oil, ExxonMobil Corp.'s 70%-owned Canadian affiliate.
On the Canadian economists' elaborate accounting yardstick, the marginal effective tax and royalty rate, or METRR, the Trump plan drops the combined federal and state take from petroleum producers to 31.2% from 36.1%. The GOP plan yields a METTR of 28.6%.
The U.S. tax reform packages would make the American burden close to par with the current Canadian petroleum production METTR of 28%. But a tie score is a loss for Canadians because of additional government levies that the United States does not impose and shows no signs of adopting, said the economists.
North of the border, federal and provincial governments including Alberta, the chief oil- and gas-producing jurisdiction, are enacting carbon taxes on greenhouse gas emissions. In addition, provincial royalty rates automatically rise when commodity prices increase.
"Should Republican tax reform result in a more competitive U.S. business structure, Canada will no longer enjoy its significant tax-competitive advantage," said the economists. "If the U.S. corporate tax burden becomes similar to Canada's, its recent deregulation and its lighter carbon policies will make the United States a more attractive destination for oil investments than Canada for international investors.”
Other factors besides the intricacies of corporate taxes and royalties already dull the Canadian financial edge -- and investor-unfriendly trends north of the border are worsening, the study said.
"The U.S. already enjoys the advantage of being a much larger market, and having a faster-growing economy. Investors also enjoy more regulatory certainty in the U.S., where the sector is being aggressively deregulated, as opposed to Canada where new and sometimes unexpected twists in the regulatory environment are becoming more common."