Page 75 - Azerbaijan State University of Economics

THE JOURNAL OF ECONOMIC SCIENCES: THEORY AND PRACTICE, V.71, # 1, 2014, pp. 53-79

In searching around many jurisdictions it was observed that most governments accept only

cash, bonds and bank guarantees. Few jurisdictions allow third party trusts as financial security

for reclamation purposes. Despite all the similarities in tax rates (Appendix 3), tax rules and

allowances established by various governments around the world, it was found that most

jurisdictions would not allow for tax deductions on reclamation securities.

5. Conclusions

Unlike many other jurisdictions around the globe, Canada’s tolerant tax regime allows the

companies to keep almost a 100% of marginal increases in their internal rate of returns.

Moreover, Approval Holders have a free choice to choose QETs at their discretion by avoiding

regular tax and royalty payments otherwise they would have incurred. The major caveat

mentioned by this report is the uncertainty of a potential use of QETs and future prices of WTI

crude. QETs are deductible for both, royalty and tax purposes and we expect Approval Holders

to take a complete advantage of this financial security created by the Income Tax Act of Canada.

Although the use of QETs may not have dramatic impact on royalty revenues when crude prices

are high I believe suggestions should be made to freeze tax and royalty deductibility provisions

of QETs at times with declined commodity prices. It is suggested that the Government of Alberta

reach a consensus with Approval Holders by putting certain rules in place including:

1. Ruling out a new law against the use of QETs during low crude prices. If we consider the

fact that Supported Infrastructure Organizations in Alberta (SIOs) are funded by the provincial

budget then the limitation on QETs during down times would avoid any financial stress.

2. If new ruling does not seem to be realistic, then communicating with Approval Holders and

operators on their expected choices of security types and factoring those results in to medium term

budgeting decisions.

75