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Originally Posted by the_only_turek_fan
Thanks for explaining that.
First question.....why can corporations defer taxes? Makes no sense to me.
Last year they only paid $700 million in taxes in North America and let's assume that it was all in AB. Now lets raise this by 20% so the new value is 840MM. 140MM is a lot of money, but it is on over $5,000MM in pre-tax Profits (taxes would go from 14 to 16.8% of profits; 2.8% extra).
Full disclosure: I work for a big engineering company and CNRL is one of our clients.
It is that $140M that concerns me. That is $140M that is taken out of cash flow to fund future projects. It may not seem like a lot, but that original $700M is based on the 2014 oil price. I assume the number goes higher, if you take a year where the average price of oil is higher than the 2014 average.
My whole point is, that dollar taken by the government is a dollar taken away from project development. Surely, you can agree on that.
Here is a thought experiment. And what KOL was getting at. If you go from 10% to 0%, does that not help producers a bit? By reducing the tax bill, you may (no guarantees that this will work) have allowed companies to not put projects on hold. At least they would have been able to continue with smaller projects. Furthermore, it could have allowed them some money to increase the dividend and/or proceed with share buy backs that could have prevented their stock price from plunging.
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Now you are talking much deeper questions (and some that would be better addressed by philosophers and political scientists).
Why defer? As an incentive… Back to the personal tax situation. The government figures that it is better to have citizens invest their money and let it grow than to collect it now and risk the citizen require financial assistance during their retirement – a bit of a win-win for everyone involved.
Same thing for corporations… they would rather expense things now (save taxes) than have to amortize it away over time. So in order to incentivize companies into investing their cash domestically rather than spending overseas or paying out cash as dividends, the gvt’ allows them to use those expenditures as tax shields so they pay less tax now, but firms have to catch up in the future. Riskier projects, ‘E’s, provide a better tax benefit than less risky projects, ‘D’s, but ultimately the corp will have to make square with their tax responsibility (ie, over time, cash taxes will equal the corporate tax rate). E&P’s will usually continue to invest in tax beneficial development however so it can sometimes tough to tease it apart over a single quarterly report.
E.g. A firm has 500mm in profits and owes 25% in corp tax (15% fed + 10% AB) for a total tax burden of 125mm. However, they have tax pools available this year shielding 220mm of profits so they only actually pay the govt cash taxes of 70 mm ((500-220)x0.25) but have to show a deferred tax charge for 55mm (220x0.25) on their balance sheet. Now a tax increase happens so in future years they have to pay 27%. Unfortunately that causes their deferred taxes to increase from 55mm to 59.4mm to reflect the new rate.
But wouldn’t a zero % tax rate for the company be better? Absolutely… for the company, but the company receives many benefits by being located in Alberta (whether those are equivalent to the tax charge is a separate discussion). Now if you could show me that all of the shareholders, employees, suppliers etc. were in alberta, you could probably make me consider a 0% rate, but reality is far from that case. Kevin o’leary certainly would be happier (and other non-alberta investors would) but as a AB citizen, I wouldn’t.
Furthermore, I don’t have much sympathy for shareholders either. Tax and royalty rates are not guaranteed and are a risk that a shrewd investor can chose to avoid or hedge their exposure to. If you look in CNRL’s AIF you will see those clearly listed in the risk factors section, why should I, as an Albertan subsidize a shareholders foolishness?