Page 69 - Azerbaijan State University of Economics

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

royalty revenue for the government. Unlike LOC where the establishment cost deductible for

income tax purposes is 1%-2% of the face amount, QETs are fully deductible meaning it results

in huge amount royalty reduction as a bottom line.

The advantage of full QET deduction from revenues as an allowed cost is enabled by the

Income Tax Act of the Government of Canada. QETs are created as a response to an unfair tax

positions faced by medium-to-small size mining companies. Before QETs, all the mining

companies were not allowed to deduct the full amount of their reclamation securities set aside for

reclamation purposes. As a result, these smaller companies had to pay materially higher tax

money. The importance of establishing QETs is that it creates a choice for Approval Holders

from the tax point of view. With the establishment of the QET, Approval holders can choose to

either pay more tax and royalty revenues by using LOC as an instrument or they may want to use

QET to considerably reduce their tax and royalty payments for a single fiscal period.

In addition, during the periods with rising commodity prices the government may choose

to review its royalty policy and excessively charge the Approval Holders on top of current

economic rent. In response to such potential reviews by government the Approval Holders may

contribute to QETs during the same fiscal year by decreasing their taxable income for that

period. Moreover, companies can withdraw from QETs when royalty rates become lower as a

result of decreasing market prices.

With this choice in mind we assume that companies would prefer QETs to LOC towards

the end of their reserve life. The assumption of increasing importance on QETs instruments

demonstrates once more that the Government of Alberta should take a thorough look at royalty

sensitive parts of its provincial budget.

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