Royalty rates aren’t a tax.
You see, the non-renewable resources that oil and gas companies extract from the ground (bitumen, oil, natural gas, coal, etc) are public resources. They belong to the public: to you and to me. We collectively “own” them (as far as anyone can own anything that was here before we were).
Corporations shouldn’t be able to come into a territory and extract publicly-owned resources for free. If the public is going to allow them to extract that publicly-owned resource for profit, then the public should be reimbursed for that.
Royalty rates are input costs for a company. Just like a textile company pays for bales of cotton or a vegan burger company pays for bushels of peas.
Alberta is the supplier of the oil, and the bitumen, and the natural gas, and the coal. We, the people, are the supplier; the provincial government simply manages it for us, so we don’t have to. And as the supplier, we’re entitled to charge our customers for the products we sell them.
Royalty rates aren’t a tax to corporations. It’s an expense. Like worker wages, or equipment, or utilities, or printer paper.
Just because the government happens to be the supplier doesn’t mean it’s a tax. And just because the supplier of one of your costliest expenses happens to be a government doesn’t entitle you to low tax rates.
6 replies on “Royalty rates aren’t a tax”
It’s almost as though you authored this specifically for me 🙂 I don’t see it posted on your Twitter (too old to figure out new technology, I guess), so I’ll comment here.
Your entire idea that royalties should not be considered a form of tax to a company though predicate on your idea that we, the public, own this oil. And this is untrue. 81% of Alberta land’s mineral rights are owned by the crown. The remaining 19% is owned mostly federally and by privately owned corporations (see Source 1). Although we typically interchange the terms “crown” with “public”, that crossover isn’t necessarily true. Crown land simply means the government owns it and grants permission for no-contact entry by the public (see Source 2). This does not mean, however, that you or I or anyone else of the public can do what we wish on this land. For example, I am not permitted to go build a house on this land. It’s not “owned by me” in that sense. Similarly, neither you or I, nor anyone else of the public can decide what to do with the mineral rights on crown land. Those rights are owned by the government and the government is responsible for the decisions as to the production rights to that oil. Many Albertan’s confuse Alberta’s mineral rights to those of Texas. In Texas, an individual can own mineral rights (or at least, it happens more often, as Source 1 shows, there is a very tiny percentage of mineral rights that are held privately).
As Alberta owns the mineral rights, they determine to whom drilling rights be awarded, and with those drilling rights come royalties. Now, not all wells have similar royalties. Royalties are predicated on a number of factors, including reserve sizes and oil quality. Also, the structure of payment isn’t necessarily the same. Royalties can be paid in cash after drilling, but they also can be paid in kind. Regardless, I’ve yet to see a well in Alberta that doesn’t have a requirement for the drilling company/partnership to pay royalty of the hydrocarbons removed from the ground.
A quick google search of the definition of the word “Tax” yields a result indicating that taxes are mandatory fees levied on individuals or corporations and enforced by a government entity. Sure sounds like a royalty, doesn’t it? I’ll concede the point that royalties are not TREATED like taxes (i.e. they are not factored or considered in loss carryforwards/carrybacks, they do not come with credits or deductions, they do not have temporary or permanent differences to account for. But they are mandatory fees required by the government to be paid. At some point, I believe you compared oil production to the production of textiles, in the sense that a company that produces textiles doesn’t consider the purchase of raw materials a “tax”, but rather an expense. The thing is, however, a textile manufacturer is not required by the government to pay them for the raw materials that they purchase. In fact, supposing a textile manufacturer has to import their raw materials from another country, they end up paying a fee to that country called an import tax (it’s a mandatory fee levied on that company and enforced by a government entity).
Out of curiosity, what is your “so what” of this article? Either way you look at it, royalties are an expense that reduce net income for corporations. Whether you label them as a tax or operating expense, they result in reduced net income for these companies.
Source 1: https://www.alberta.ca/mineral-ownership.aspx#toc-0
Source 2: https://www.thecanadianencyclopedia.ca/en/article/crown-land
“81% of Alberta land’s mineral rights are owned by the crown.”
Yes. This is what I mean by “public”.
“The remaining 19% is owned mostly federally and by privately owned corporations”
I consider federally-“owned” land to also be public. Corporate-owned land was sold to corporations by the public. That doesn’t really negate my point.
“This does not mean, however, that you or I or anyone else of the public can do what we wish on this land.”
I wasn’t suggesting otherwise.
“As Alberta owns the mineral rights, they determine to whom drilling rights be awarded, and with those drilling rights come royalties. Now, not all wells have similar royalties. Royalties are predicated on a number of factors, including reserve sizes and oil quality. Also, the structure of payment isn’t necessarily the same. Royalties can be paid in cash after drilling, but they also can be paid in kind. Regardless, I’ve yet to see a well in Alberta that doesn’t have a requirement for the drilling company/partnership to pay royalty of the hydrocarbons removed from the ground.”
Yes.
“But [royalties] are mandatory fees required by the government to be paid.”
Just like any supplier has mandatory fees they require that their buyers pay.
“The thing is, however, a textile manufacturer is not required by the government to pay them for the raw materials that they purchase.”
But they are required by their supplier to pay for the raw material that they purchase.
“Either way you look at it, royalties are an expense that reduce net income for corporations. Whether you label them as a tax or operating expense, they result in reduced net income for these companies.”
Agreed.
So your last point of the article “And just because the supplier of one of your costliest expenses happens to be a government doesn’t entitle you to low tax rates.” confuses me then. Oil and gas companies don’t pay a lower % on their net income before taxes (i.e. if a textile company has NIBT of $100 and a O&G company has a NIBT of $100, they both pay the same rate on that $100). Royalties as you put it are an input cost. So if the company has raw revenue of $1,000, and their operating expenses are $400 and royalties are $300, they pay income taxes on their net income of $250 ($1,000 – $400 – $350). Is your idea suggesting that actually they should be paying taxes on $600 ($1,000 revenue – $400 opex only)?
Yes, I know oil and gas companies don’t pay a lower rate on their net income before taxes. I didn’t argue otherwise.
No, I think they should pay taxes on their net income, like all companies.
Edit to my above comment:
So if the company has raw revenue of $1,000, and their operating expenses are $400 and royalties are *$350, they pay income taxes on their net income of $250 ($1,000 – $400 – $350). Is your idea suggesting that actually they should be paying taxes on $600 ($1,000 revenue – $400 opex only)?
No.