A major concern is the Administration’s repeated proposal to raise oil and natural gas industry taxes by $90 billion. Major energy producers pay very large taxes and are already a tremendous source of revenues to local, state and federal government budgets. Contrary to what some suggest, the oil and natural gas industry currently enjoys no unique tax credits or deductions.
Proposed "Double Taxation" of American Oil and Natural Gas Producers
- U.S. tax rules have consistently allowed companies to offset U.S. income tax on foreign earnings with income taxes paid on those earnings abroad. Currently, the foreign tax credit enables all U.S. companies to operate and produce goods and services in other countries without taxing profits twice — once by the host country, and once again by the home country. U.S. companies benefit from a level playing field with foreign competitors.
- According to a recent IHS CERA study, if these rules were changed and the foreign income for select U.S. oil and gas companies, like ExxonMobil, were to be double taxed, our foreign-based competitors and the full range of foreign-government-owned oil companies would gain a significant competitive advantage abroad. Those government-owned oil companies and other international competitors would continue to incur only one level of taxation in nearly every case, while American companies were subjected to “double taxation.”
Discriminatory Repeal of Section 199 for Oil and Natural Gas Producers
- Section 199 of the Internal Revenue Code encourages all U.S. manufacturers and producers — including the oil and natural gas industry — to invest, expand and create jobs in the United States.
- The law, enacted in 2004, modestly reduces U.S. corporate tax rates for U.S. businesses. It applies broadly to everything from developing software, producing movies, and printing newspapers, to farming, coal mining and many other lines of business. Oil and natural gas producers should be treated no differently from these other U.S. industries.
- Proposals to repeal Section 199 for oil and natural gas activities would endanger some of the 9.2 million U.S. oil and natural gas jobs including those jobs supported by the industry. They would also likely discourage new investment in America’s energy sector, precluding a significant boost to economic recovery and job growth. There is no defensible tax policy basis for discriminating against oil and natural gas producers.
Eliminating the Ability to Expense "Intangible Drilling Costs"
Intangible drilling costs (IDCs) include the labor for setting up drill sites, designing platforms and drilling the wells — similar to research and development (R&D) costs incurred by many other businesses and industries. The current tax treatment of IDCs is directly reflected in oil and natural gas industry jobs, and current law allows independent producers to immediately deduct these legitimate business costs. Integrated oil companies can recover 70 percent of those costs in the year incurred and the remainder over five years.
IDCs enable U.S. oil and natural gas companies to continue exploring for and producing domestic resources, which provide significant revenue to federal and state governments. In fiscal year 2012, the Department of the Interior’s Office of Natural Resources Revenue (ONRR) disbursed more than $12 billion in royalties from energy and mineral production. While the U.S. Treasury received $6.6 billion, more than $2.1 billion was distributed to 34 states, and American Indian Tribes and individual Indian mineral owners received $717 million.
The current treatment for IDCs is hardly a special rule for oil and gas. It is consistent with the full deductibility of R&D expenses currently available to all taxpayers and is exactly how development costs for all other natural resources are treated. Repealing the deductibility of IDCs will necessarily force U.S. energy producers to curtail exploration budgets, leading to less domestic production, the loss of U.S. jobs, and increased imports.