api industry groups criticize baucus tax proposal

December, 16^th 2013

 

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The American Petroleum Institute (API) and other energy industry groups expressed concern Friday over Sen. Max Baucus (D-Montana)’s discussion draft on cost recovery and tax accounting, calling for a “pro-growth tax code” that promotes oil and natural gas production, investment and job creation.

On Nov. 21, Baucus unveiled the third package in a series of proposals to overall the tax code, which he called bloated and outdated in a Nov. 21 press release.

“The last major overhaul of our country’s tax code occurred in 1986,” Baucus stated. “Since then, there have been more than 15,000 changes to the tax code, and the law has become increasingly complex. More must be done to simplify tax rules, lessen the burden on small businesses and jumpstart job growth.”

The discussion draft focuses on reforming cost recovery and tax accounting rules, including a repeal of accounting methods such as LIFO (last in, first out). The discussion draft would require businesses to deduct the cost of research and development, natural resource extraction, and 50 percent of advertising expenses over 5 years.

Like research and experimental costs for other industries, intangible drilling costs (IDC) can be fully deducted in the first year for most independent U.S. oil and gas companies under current law. Integrated oil and gas companies are limited to deducting 70 percent in the first year, an API spokesperson told Rigzone. Under the proposed changes, independents and integrated companies would only be able to recover 20 percent of IDCs in the first year, and would have to amortize the remaining costs over the following five years, Brian Johnson, tax lobbyist with API, told Rigzone.

IDCs typically consist of the salaries for drillers, as well as fuel and hauling costs. In July, API unveiled a study which found that delaying the oil and gas industry’s ability to quickly recover intangible drilling cost recovery would result in losses for U.S. oil and gas production and jobs.

It also would replace the current rules for depreciation of assets with a system based on estimates from the Congressional Budget Office (CBO), reduce the number of major depreciation rates from more than 40 to 5, and eliminate the need for businesses to calculate depreciation separately for each of their assets, other than real property, according to the discussion draft. Baucus has requested CGO produce a letter detailing their analysis of economic depreciation rates of tangible assets.

The Senate Finance Committee is expected to release a new tax reform policy draft before the end of next week, Politico reported Friday.

In a Dec. 13 letter, API and other industry groups praised Baucus for seeking to make the U.S. tax code less complicated and more competitive. However, they voiced concerns that Baucus’ proposal to extend the period during which businesses can recover their operating or labor costs, as in the case of drilling expenses, will take cash away from capital-intensive businesses like ours and significantly reduce future domestic investment.

Additionally, proposals to extend depreciable lives and eliminate valid, long-standing accounting methods, like LIFO, will also significantly hurt energy companies seeking to grow and invest in new capital projects.

“While tax policy can indeed be complicated, it has always been a policy objective to support and encourage domestic investment and the jobs such investment creates,” the groups stated. “We believe, therefore, that shifting cash from robust private investment conflicts with that objective.”

The groups noted that the U.S. oil and gas industry has been one of the few bright spots as the United States seeks to recover from the economic downturn, and that recent polls show U.S. voters broadly support domestic energy investment and are against taxes that could raise their energy costs.

“The industry has invested hundreds of billions of dollars to develop our nation’s oil and gas reserves, expand our refining capacity and develop innovative new technologies to meet the energy demands of a growing economy,” the groups said in the letter.

“This investment has created tens of thousands of high paying jobs and billions of dollars in new revenue for the government,” the groups added. “These are exactly the types of investments tax policy should encourage and support.”

The groups joining API in calling for a “pro-growth” tax code include the Association of Energy Service Companies, the American Exploration & Production Council, the American Fuel & Petrochemical Manufacturers, America’s Natural Gas Alliance, Energy Equipment and Infrastructure Alliance, the Independent Petroleum Association of America (IPAA), National Association of Convenience Stores, the National Ocean Industries Association, the Natural Gas Supply Association, the Petroleum Equipment Suppliers Association, the Petroleum Marketers Association of America, SIGMA and the U.S. Oil & Gas Association.

API noted that both the research and development deduction and the IDC cost deduction serve identical policy goals of innovation, development and growth.

“The elimination of the IDC reduction would not only jeopardize the advances that are responsible for some of the U.S.’ biggest and latest oil and gas plays, such as shale oil and natural gas, but also endanger many of the 9.2 million American jobs supported by the industry,” API said in a statement.

Baucus also proposes repealing completely the percentage depletion deduction, which has been part of the tax code since 1926. Depletion is a form of depreciation of mineral resources that allows for a deduction from taxable income to reflect the declining production of reserves over time, according to IPAA’s website.

Percentage depletion is only allowed for independent producers and royalty owners; integrated oil and gas companies haven’t been able to use percent of depletion since the 1970s, Johnson noted. Percentage depletion is calculated by applying a 15 percent deduction to the taxable gross income of a productive well’s property, according to IPAA’s website, and is limited to the taxpayer’s first 1,000 barrels of oil (or 6,000 million cubic feet  of natural gas) of production per day. It also is capped at the net income of a well and limited to 65 percent of the taxpayer’s net income.

Sumber : www.rigzone.com