CERA: Tax hikes would hit already hamstrung US oil industry

Nick Snow
OGJ Washington Editor

WASHINGTON, DC, Sept. 22 -- White House proposals to increase oil and taxes would harm a US industry that is already having trouble competing globally, officials from the US Chamber of Commerce and IHS Cambridge Energy Research Associates warned.

They cited a CERA study that concluded that US tax policies are not able to invest as effectively as their non-US competitors, including publicly traded multinationals as well as national oil companies. “In framing tax policies, the US is not a global sovereign. It exists with other sovereigns, and tax decisions need to be made in the context of a world that’s not only competitive but becoming increasingly competitive,” CERA Chairman Daniel Yergin told reporters in a teleconference hosted by the US Chamber’s Institute for 21st Century Energy.

Yergin said CERA began trying to measure US multinational and independent producers’ shrinking share of global reserves relative to their foreign competitors and quickly found that this country’s tax system was a major cause. “We observed, looking at our data, US companies’ shrinking position not only in relation to national oil companies but also European oil companies,” he said.

David Hobbs, CERA’s chief energy strategist, explained that the new study considered not only fiscal policies of countries where oil and gas are being developed, but also terms in companies’ home countries.

“The costs of repatriating income from international operations back to the United States are higher for US companies than what many of their chief competitors face when repatriating income back to their respective countries,” Hobbs said, adding, “That places a hurdle in the path of US-based oil and gas companies that is higher than for companies based in other countries. Securing new concessions requires them to overcome this hurdle.”

‘At a disadvantage’
After looking at national tax policies and their impacts on returns of companies based in Canada, France, India, the Netherlands, the UK, and the US, CERA found that the US ranked only above India. “In competing for assets against companies against all the major home countries of the world, the US finds itself at a disadvantage, which affects the assets its companies have under control,” said Hobbs.

A major difference is that the US continues to use an international tax system when most other countries have moved to a territorial approach that taxes income only within their borders, according to Pamela F. Olson, a former assistant US Treasury secretary for tax policy who now is tax partner at the law firm Skadden, Arps, Slate, Meagher & Flom LLC.

“This makes the US increasingly unusual,” she explained. “It has an extremely detailed and complicated set of rules which limit credits a company can earn, including limits for dual capacity taxpayers. Companies are required to prove that foreign payments are, in fact, for a tax. The Obama administration’s position is that these taxes are in fact royalties, which puts the US government in a very different position for the dual capacity taxpayers.” This is a major flaw in White House policymakers’ justifications for ending the foreign tax credit and domestic manufacturing tax credit for oil and gas companies, Olson and Yergin each said.

“When people use the term ‘subsidy,’ I notice that most people talk about the supposed mischaracterization of royalty as a tax,” Yergin said. “I think the word has been thrown around a little too casually. What we’re talking about is a change in the tax system which would put US companies which already are at a competitive disadvantage at a further disadvantage, which ultimately would affect tax revenue. The budget deficit should be addressed, but it’s also important to consider the consequences,” he said.

Karen A. Harbert, president of the Chamber’s Institute for 21st Century Energy, said, “These proposed tax policy changes undermine the ability for the domestic oil and gas industry to compete abroad, which is a grave concern to the US Chamber of Commerce. The deficit is obviously a driving motivator for these proposals. We have seen treatments for oil and gas companies surface already as a potential [way to pay for other federal programs], and we expect more [proposals] before the end of the year.”

Contact Nick Snow at nicks@pennwell.com.

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