Legislature(2011 - 2012)BARNES 124
02/29/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HJR32 | |
| HB328 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 328 | TELECONFERENCED | |
| *+ | HJR 32 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 328-OIL AND GAS CORPORATE TAXES
2:41:40 PM
CO-CHAIR FEIGE announced that the next order of business would
be HOUSE BILL NO. 328, "An Act relating to the oil and gas
corporate income tax; relating to the credits against the oil
and gas corporate income tax; making conforming amendments; and
providing for an effective date."
2:42:15 PM
CO-CHAIR SEATON introduced HB 328 as the prime sponsor,
explaining that the bill would reinstate the oil and gas
corporate income tax regime that was Alaska law from 1978-1981.
It would require oil companies to pay their corporate income tax
on the profits made in Alaska, which is generally referred to as
separate accounting. It is a matter of equity. Alaska-only oil
companies pay their corporate income tax on Alaska profits while
international oil companies can write off their investments in
other countries against their Alaska corporate income tax.
Under HB 328, international oil companies would be treated like
other oil companies in Alaska.
CO-CHAIR SEATON specified that separate accounting was
established in 1975 and went into effect in 1978 because Alaska
felt that it was not getting the proper amount of its corporate
tax, which was 9.4 percent, and it was not being paid on the
profits made from Alaska. That was challenged in the 1980s. It
was upheld in the lower courts and appealed to the Alaska
Supreme Court where it was upheld on all grounds (slide 1 of the
Power Point presentation accompanying Co-Chair Seaton's
introduction of the bill). That ruling was then appealed to the
U.S. Supreme Court, which took the case and dismissed it saying
that there were no federal constitutional or federal statutory
problems that needed to be resolved by the court. The courts
have determined that separate accounting falls within the
state's legitimate taxing authority.
2:44:19 PM
CO-CHAIR SEATON related that during their tour of Norway, Alaska
legislators asked whether Norway does separate accounting so
that companies pay on their profits only in Norway. The answer
was yes, most regimes around the world do that. Some U.S.
states have two different sections of corporate income tax -
regular corporate income tax if separate accounting is used, in
which the company pays on its profits in that jurisdiction; or
"water's-edge" taxation where the company elects to pay tax
based on any profits and expenses in the U.S. and in which the
company pays an additional amount that is more than a 50 percent
increase in the taxes.
CO-CHAIR SEATON stated that when the petroleum production
profits tax (PPT) was developed, and later Alaska's Clear and
Equitable Share (ACES), it was critical to not have ring
fencing. Under ring fencing, a company going into a new area
must write off its expenditures in that area against the profits
made in that area. The Alaska State Legislature did not want
ring fencing because it wanted to stimulate investment in a
broad scope across Alaska. However, Alaska's current tax
[method] of worldwide apportionment does exactly that - it says
a company can invest in other places and if those are not as
profitable they can be used to reduce the corporate income taxes
to Alaska. For these reasons, Alaska needs to go back to
separate accounting.
2:46:25 PM
CO-CHAIR SEATON directed attention to slide 2, saying it is from
one of the documents in the Alaska Supreme Court case and shows
the loss to the State of Alaska as being about $1.8 billion
during the four years [of 1978-1981]. He explained that at the
time, this $1.8 billion liability is what the previous
legislature was looking at, which was before the value in the
permanent fund that the state has now. Fearing that much
liability, the legislature decided to return to worldwide
apportionment until the court cleared things up. About $400
million of that $1.8 billion was interest on those years, so the
loss to the state was really about $1.4 billion.
CO-CHAIR SEATON moved to a comparison presented in 2000 to the
House Special Committee on Oil & Gas by then Deputy Commissioner
of the Department of Revenue Daniel Dickinson (slide 3). In
this presentation Mr. Dickinson compared the actual oil and gas
income tax collected under worldwide apportionment for the years
[1982-1997] to estimated revenues under separate accounting.
The comparison shows the state collected $4.6 billion less under
worldwide apportionment than it would have under separate
accounting. He explained that this same numerical comparison is
shown graphically on slide 4, with the actual income tax for
each year shown by the bars on the left and the estimated
revenues under separate accounting shown by the bars on the
right. While there is a relationship that changes due to
different amounts of investments, expenses, and prices in each
year, he pointed out that Alaska's 9.4 percent tax rate on the
money that was earned in Alaska was the higher of the two
methods.
2:49:45 PM
CO-CHAIR SEATON turned to the fiscal note for HB 328 (slide 5),
reading aloud the second sentence of the middle paragraph, which
states: "Preliminary estimates show that under separate
accounting, oil and gas corporations would have paid
approximately $250 million more during each of the last 5 fiscal
years in corporate income tax if this legislation had been in
effect." He said there are three different determinations - the
determination when separate accounting was in effect from 1975-
1981, the estimates from Dan Dickinson from 2000, and the
current estimate from the Department of Revenue - all of which
are in somewhat the same range of $200-$300 million per year.
CO-CHAIR SEATON reviewed the net U.S. exploration and production
income for ConocoPhillips [for the years 2000-2010 and comparing
the income from Alaska to the Lower 48] (slide 6). He explained
that ConocoPhillips, a good company, makes filings with the U.S.
Securities and Exchange Commission (SEC), so Legislative
Research Services was able to compile the comparison. He next
compared the global net exploration and production for
ConocoPhillips in Alaska, the Lower 48, and internationally
(slide 7). He noted that Alaska represents a significant amount
of income, but that amount is quite variable depending upon what
is happening in other parts of the world. Separate accounting
would not consider what is happening in other parts of the
world, so the corporate income tax would be paid on the profit
made in Alaska. In response to Co-Chair Feige, he stated that
in 2009 ConocoPhillips reported no profits in the Lower 48
(slide 6).
2:52:20 PM
CO-CHAIR SEATON drew attention to an article in the May 2011
Petroleum News by Greg Garland of ConocoPhillips, senior vice
president for exploration and production in the Americas (slide
8). He related that in this article Mr. Garland states that the
Eagle Ford play [in South Texas] "offered $45 per barrel margins
last year, twice the average of ConocoPhillips' global
portfolio." Thus, Co-Chair Seaton continued, the average of
ConocoPhillips' global portfolio is $20-$25. However, in spring
2011, when oil price was at approximately $118 per barrel (slide
9), the Alaska margin was $43.50 per barrel, so Alaska margins
are well above the worldwide margins, which means Alaska is
diluting its margin with the less profitable worldwide margins.
He added that in another publication, the name of which he could
not recall, the chief economist for ConocoPhillips stated that
the company's cost of producing a barrel of oil is $15.48, so
another $4 or so would be added to the margin here.
2:54:12 PM
CO-CHAIR SEATON addressed another graph in the committee packet
regarding competitiveness that depicts what the tax rate is, not
what the oil companies are paying. Federal tax is 35 percent
and Alaska state tax is 9.4 percent, but because of worldwide
apportionment Alaska is receiving less than 9.4 percent, as was
shown in the three analyses mentioned earlier. This means that
Alaska is actually more competitive than shown in those tables.
He added that when making a presentation to the full legislature
in Anchorage and to a committee meeting in Juneau, Pedro van
Meurs stated that Alaska should definitely have separate
accounting.
CO-CHAIR FEIGE, regarding slide 8, inquired whether Co-Chair
Seaton is essentially arguing that for ConocoPhillips the profit
margins per barrel are essentially the same in Texas and Alaska.
CO-CHAIR SEATON replied that they are according to Greg Garland.
He reminded members that ConocoPhillips has testified a number
of times that it is very distinct between margin and profit. He
said the comparison he was trying to make is that Mr. Garland
stated that [the margin of $45 per barrel] is twice
ConocoPhillips' average global portfolio.
2:57:27 PM
CO-CHAIR FEIGE allowed that the Alaska margin of $43.50 depicted
on slide 9 is pretty close to the $45 margin on slide 8. He
noted that the article on the top left of slide 8 states that
ConocoPhillips plans to invest $2 billion in liquids-rich shale
plays, which sounds like the Eagle Ford area, yet the company is
only investing less than $1 billion in Alaska. He asked why
there is unequal investment if the margins are the same.
CO-CHAIR SEATON answered that it is a situational risk in Alaska
because there is only one way to get the oil out of the state.
ConocoPhillips is currently getting 63 percent of its profits
out of this single pipeline, so if anything happens to that
pipeline there is no way to get that oil out. Additionally,
ConocoPhillips would also incur the expense of having to shut in
all of its wells plus the expense of getting the pipeline
running again. ConocoPhillips has been pretty much flat in
investing since 1996 as far as the number of wells it is
drilling on the North Slope, even though tax rates have been
totally different and even though prices have been totally
different. Risk factors are being looked at that cannot be
mitigated and the question is whether the corporate board would
look at that as a fiduciary responsibility if the company
further concentrated its profits coming from Alaska. For
example, 100 percent of the company's profits came from the
North Slope of Alaska in 2009, about 60 percent in 2010, and
63.6 percent in 2011. Therefore, it is a concentration thing
that does not relate necessarily to profit margin, but to
exposure. Co-Chair Seaton added that there is another question
on decisions, which is that the operating agreement on the North
Slope is such that if any one of the three companies decides not
to invest, that decision vetoes the project. So, it is unknown
whether it is ConocoPhillips because of that risk or one of the
other two major players that are not sanctioning an investment.
3:01:09 PM
REPRESENTATIVE DICK said he also saw that figure where
[ConocoPhillips] is receiving $20 a barrel for getting oil out
of the ground while it is only costing $15.48. Rounding off the
numbers, he calculated that at 600,000 barrels a day and a $4.52
discrepancy it comes up to a little less than $1 billion. What
struck him is that education is being scrutinized almost to the
point of hostility and yet there is this figure of $1 billion.
CO-CHAIR SEATON responded that [slide 9] says "typical company"
because the legislature has never been given the confidential
information of what the production costs are for each company.
Last month the chief economist for ConocoPhillips released the
information publicly that it was $15.48, which is why he is
saying to add another $4.50 to the figure on slide 9.
3:02:45 PM
CO-CHAIR FEIGE asked whether the bar graph on slide 6 is
depicting the income for ConocoPhillips.
CO-CHAIR SEATON confirmed it is the income and offered to
provide the figures in percentages if that was desired.
3:03:04 PM
CO-CHAIR FEIGE inquired how much oil ConocoPhillips produces in
Alaska versus Texas and what price is received. He understood
that recently the Texas oil price was down to $80 per barrel
while Alaska North Slope crude was above $100. Significant
differences in quantity and price will influence the bar graphs,
he noted.
CO-CHAIR SEATON said Co-Chair Feige is correct. The question,
however, is whether the state wants things from other countries
or Texas to influence the corporate income tax that is paid in
Alaska or does the state want the companies to simply pay their
9.4 percent on the profits that are made in Alaska. The
worldwide apportionment works both ways - it can make things go
up and down because of what Alaska has and the argument can be
made that if Alaska keeps worldwide apportionment it can grab
profits that are made in Indonesia. However, all of the
[comparison] calculations with separate accounting show that
every single year Alaska has been reducing its corporate income
tax to basically subsidize other operations in other parts of
the world. No one is trying to do anything unfair, it is just
being said that if Alaska's corporate income tax rate for a
company like Great Bear Petroleum, which only has operations in
Alaska, is going to be 9.4 percent of its income in Alaska, is
it not then fair that BP, ConocoPhillips, or ExxonMobil pay 9.4
percent on the income that they make in Alaska. The question of
whether it is correct or not went through the trial courts,
Alaska Supreme Court, and U.S. Supreme Court, and it was
determined at several points that separate accounting much more
accurately reflects the corporate income tax on the profits in
the jurisdiction of Alaska.
3:05:53 PM
REPRESENTATIVE MUNOZ asked what the real percentage is that
ConocoPhillips pays to Alaska.
CO-CHAIR SEATON replied it is difficult to answer because the
information is combined. On its 10-K filings, ConocoPhillips
reported 1 percent, but that was not a real 1 percent - that was
1 percent compared to its worldwide profit. ConocoPhillips
lumps all jurisdictions in the Americas together for its U.S.
report. When ConocoPhillips files in say, North Dakota, it is
unknown whether the company is paying that state's 5.15 percent
or paying water's-edge, which adds another 3.5 percent corporate
income tax. North Dakota has noticed that revenue is lost,
whether apportionment is jurisdictional to the U.S. water's-edge
or worldwide. Separate accounting simply does one thing -
corporate income tax is paid on the profit that is made only in
Alaska. He stressed that he is not saying any company has done
anything wrong; the State of Alaska creates the tax system and
people obey that system. If the state allows no ring fencing
around Alaska, if the state takes the same philosophy it did for
production tax to not ring fence new fields in the North Slope,
then the same thing applies here - the further the net is drawn,
the more washout there is. All three of the aforementioned
comparisons show that Alaska is losing income because it is
getting less than 9.4 percent.
3:08:57 PM
REPRESENTATIVE MUNOZ inquired whether all of the major companies
use the worldwide apportionment method.
CO-CHAIR SEATON answered the companies use it where they are
allowed to, but most jurisdictions do not allow it. That is
what was interesting about Norway - Alaska has all the same
players that are working in Norway and all of them pay separate
accounting in Norway. He said he does not blame the companies
for using worldwide apportionment where they are allowed to, but
who are Alaska legislators working for? The companies are
paying the correct amount of tax under the system in place in
Alaska. The question is whether that is the appropriate system
for Alaska or should Alaska go back to separate accounting. He
said HB 328 would reinstate the 1978 tax system that has already
gone through court and been approved all the way up to the
[U.S.] Supreme Court, so it has no state or federal issues.
3:10:32 PM
REPRESENTATIVE P. WILSON noted that the governor has another
bill and the Senate has yet another bill. She asked whether the
companies would be paying more or less than now if either of
those bills and HB 328 were put into law.
CO-CHAIR SEATON replied that the companies will have to testify
to that, but he thinks [HB 328] brings some balance. More than
anything, HB 328 says that the appropriate corporate income tax
should be paid in Alaska. The other bills deal with the
production tax, which is different than corporate income tax.
Basically there is a difference in which Alaska restricts what
can be deducted for lease expenditures, but allows instant
write-off on those. Corporate income tax generally follows the
depreciation rules of the federal income tax so there is a
longer write-off period, but there are more things that can be
written off than just direct lease expenditures. He reiterated
that both the 15-year look back done in 2000 by the Department
of Revenue and the fiscal note for HB 328 show that Alaska is
not receiving 9.4 percent of the corporate income in the state
of Alaska.
3:12:58 PM
CO-CHAIR FEIGE read aloud from page 2 of the fiscal note, first
paragraph, lines 4-8, [original punctuation provided]:
This bill would require Alaska oil and gas
corporations to calculate income tax for their oil and
gas producing and transportation companies based on
income earned solely in Alaska. If oil and gas
companies are also engaged in activities other than
oil and gas production and transportation, this bill
would require those companies to calculate and pay tax
on those other activities based on worldwide
combination and apportionment.
CO-CHAIR FEIGE said this seems like Alaska would be picking and
choosing where it is asking companies to pay tax. He asked for
an explanation and suggested that the Department of Revenue also
speak to it.
CO-CHAIR SEATON responded this is not unusual. Whether under
worldwide apportionment or separate accounting in Alaska, the
tax deals only with oil and gas, not any other activities a
corporation might be involved in, which could be land leasing,
buildings, welding companies, or retail stores. Integrated oil
company means that the company has more than just oil and gas
production; for example, it could have refineries. Refineries
are different and are treated different in 10-K filings as well.
For example, in its 10-K filing, ConocoPhillips lists totally
separate lines for its manufacturing and refining businesses.
3:15:36 PM
CO-CHAIR FEIGE said he understands the aforementioned, but that
HB 328 would essentially fence off Alaska. If a company owns
assets elsewhere, it seems that the income and expense from
those assets would be taxed on a worldwide basis, which would
not be in keeping with the theme of the bill. He asked why the
bill splits this out rather than fencing off Alaska as its own
taxable entity for all of it.
CO-CHAIR SEATON deferred to the Department of Revenue for an
exact explanation of why.
3:16:55 PM
CO-CHAIR FEIGE asked the Department of Revenue and whether the
aforementioned provision would make the accounting rather
complicated for all concerned.
ROBYNN WILSON, Corporate Income Tax Manager, Anchorage Office,
Tax Division, Department of Revenue (DOR), answered it may make
the accounting complicated for two reasons. First, under HB 328
there are three components that go together. The component
being referred to is "other business," which would be on a basis
under the Internal Revenue Code while the other two components
would be on a different basis; so, there may be intercompany
transactions that would be difficult to account for. Second,
within one actual corporation, meaning a separate legal entity
as opposed to a corporate group, these operations may be mixed
in the corporation's books, so extracting the piece that is
specifically production may be difficult.
3:18:50 PM
REPRESENTATIVE GARDNER inquired whether these same companies
already do this exact thing in other jurisdictions.
MS. ROBYNN WILSON replied she is not currently aware of exactly
how separate accounting works in Norway. Within the U.S.,
states either tax on combination and apportionment, which is the
system Alaska is under, or states may tax based on a separate
company income. She offered to follow up on that if requested,
but said she is unaware of other jurisdictions that tax in the
mixture that HB 328 would provide.
3:19:50 PM
REPRESENTATIVE P. WILSON observed that the fiscal note includes
four additional tax auditors under HB 328. She asked whether it
would be easier for the department if everything was under
separate accounting.
MS. ROBYNN WILSON responded that if everything was on separate
accounting there would still be the difficulties of intercompany
transactions. Also, where a company had multiple activities
within its corporate structure within its set of books, there
would still be the problem of extracting that separate
operation. Additionally, there are the bill's administrative
provisions about when the return is due and that the department
must calculate the taxable income and the tax and provide an
assessment within four months. Presumably on top of that, would
be Chapter 5 auditing responsibilities that would go on
afterwards. Add that to the responsibility of the public
disclosure provisions in the bill. Therefore, while it might
simplify it slightly, she did not think it would simplify it
materially.
3:22:02 PM
REPRESENTATIVE P. WILSON recalled the sponsor stating he wanted
to keep the separate accounting exactly how it was before
because the courts have already ruled that that method was okay.
CO-CHAIR SEATON confirmed this to be correct. Regulations have
already been written for separate accounting under this exact
same proposal, so writing the regulations would be much simpler
because they were already written for the four years that
separate accounting was in effect. He said the advice of the
legislative legal counsel was that this has already been solved
and the state would not need to worry nearly so much about
lawsuits if no changes were made to the former structure.
3:23:46 PM
CO-CHAIR FEIGE opened public testimony.
DEBORAH VOGT noted that she joined the attorney general's office
in 1978 and retired in 1999 from the Department of Revenue where
she was serving as deputy commissioner. Given she has been
retired for 10 years and the law being talked about was repealed
more than 30 years ago, she asked for forgiveness if the cobwebs
are a little thick. She said 1978 was the year the oil started
flowing, the year that separate accounting was enacted, and the
value of a barrel of oil was about $8. Not long after that the
oil industry sued over the separate accounting law. She said
she defended that law before the Alaska Supreme Court and the
U.S. Supreme Court, so can speak with some fluency.
MS. VOGT stated that, in a very simplistic manner, she will
provide a history about the law that was on the books before
separate accounting, the separate accounting law, and the law
the state has now. All three are methods of dividing the income
of a multi-jurisdictional taxpayer so that each taxing
jurisdiction knows how much of the overall income it can
attribute to its state for tax purposes. The analogy she likes
to use is "restaurant accounting," where six people have dinner
together at a total cost of $300. Each person's share of the
dinner bill can be determined in two different ways - the whole
bill could be divided by six, or the cost of each entrée could
be attributed to the specific person eating that entree. The
first method is formula apportionment and the second method is
separate accounting. They are two means to the same end, which
is to determine the appropriate share for one person in the case
of diners or one jurisdiction in the case of taxpayers.
3:26:21 PM
MS. VOGT said she thinks Alaska was the first state to adopt the
Uniform Division of Income for Tax Purposes Act (UDITPA), which
is the three-factor formula that is most commonly used and that
Alaska uses today for almost all corporate taxpayers. Encoded
in law as AS 43.19, it is the method of attribution for the tax
under AS 43.20. This standard three-factor formula includes
payroll, property, and sales. The amount of income that a
taxpayer earns is attributed to the state by averaging the
fraction of that taxpayer's property that is in the state, the
sales that are in the state, and the payroll that is in the
state, as compared to those factors worldwide. Returning to the
restaurant analogy, she noted that it does not matter whether
separate accounting or a formula is used if everybody has about
the same thing to eat. But it gets sticky if one person has a
bowl of soup and somebody else has a big steak. The three-
factor formula assumes that profitability is fairly uniform
throughout a business or group of businesses. Neither formula
apportionment nor separate accounting is perfect; both have
flaws and both have been upheld by the courts. Most states, as
did Alaska originally, adopt the three-factor formula because it
gets them out of the business of untangling corporate affairs
and establishing transfer values. For example, if a business
manufactures in one state and sells in another, a value for the
goods as they cross state lines has to be established, which can
be tricky. Tax authorities generally suspect that a business
will tell State A that all its profits are earned in State B,
while it tells State B the opposite.
3:28:39 PM
MS. VOGT related that when she was assigned to the separate
accounting litigation in the 1970s, she had the opportunity to
review in some detail the written record of the legislature's
four-year study of the corporate income tax as it applied to oil
companies. More than 60 hearings were held over that time
period, during which the legislature learned that there were
flaws with each of the three factors used in UDITPA as applied
to an oil production company. The payroll factor is under
state's income because oil production is not labor intensive and
is largely conducted through the use of subcontractors. At that
time, she understood that there were some federal income law
incentives to operate through subcontractors; however, whether
or not that is true, most of the business is done through
subcontractors and so the payroll factor is fairly low. The
property factor is flawed largely because traditional accounting
methods and SEC rules do not recognize the value of the oil in
the ground; put another way, discovery is not an accounting
event. Obviously, the reserves that an oil company owns can be
its greatest asset, but those reserves are not reflected on its
books. When that understated property is used as compared to
fully stated property like a refinery, the result is a sliding
of the income over to the jurisdiction with the better property
formula. For a while there was a move by the SEC to go to
reserve recognition accounting, but she understood that that was
unsuccessful. The sales factor is flawed because only a tiny
fraction of the oil produced is sold in the state, so the sales
factor is not very good at attributing income. Therefore, with
none of the factors accurately representing an oil producer's
actual business value, the legislature went to the separate
accounting method.
3:30:58 PM
MS. VOGT explained that, in a nutshell, the [separate
accounting] law established value at the point of production by
netting back the ultimate sales value to the wellhead by
deducting out the transportation costs. In the late 1970s and
early 1980s, the value of Alaska North Slope (ANS) crude was not
publically available, so there were huge disputes over this
amount. Value at the point of production, then, was gross
income from which were deducted the field costs, or the costs of
producing the oil. General overhead expenses under the old
separate accounting law were apportioned, so the old law
actually incorporated apportionment in two places - one was for
general overhead joint expenses and the other was for other
income that was not oil production or pipeline transportation
income.
MS. VOGT recounted that the oil industry filed suit against the
law, alleging that it violated the U.S. Constitution's Commerce
Clause, Equal Protection Clause, and Contract Clause; industry
also alleged that it violated the State of Alaska's equal
protection laws. She noted that while separate accounting was
in effect the price of oil went from about $8 per barrel to $31,
a huge increase in those days, and therefore the revenue and the
litigation risk piled up fairly fast. In 1981, when the law was
repealed, it had collected about $2 billion. There was
obviously political pressure from the industry to repeal the
separate accounting law because it taxed so much revenue and
those who were around at that time may remember the "coup" in
1981, which many said was pushed largely by the desire to repeal
separate accounting.
3:33:03 PM
MS. VOGT pointed out that there were also legal issues with the
law at that time. In 1980 the U.S. Supreme Court had issued two
opinions involving the division of corporate income for tax
purposes: Exxon v. Wisconsin and Mobil v. Vermont. In both
those cases, the state taxed the multi-state oil industry
taxpayers using formula apportionment. The oil company
taxpayers each argued that they could prove - by separate
accounting or allocation - that they did not earn that much
income in the respective state. The Supreme Court, in upholding
those state statutes, used some fairly strong language
criticizing the flaws of separate accounting. This led some to
conclude that apportionment was constitutionally required, or
that separate accounting was constitutionally prohibited. That
is largely what led to the litigation fear over the act, and
while she personally did not put much credence in that theory,
it was not her $2 billion that was on the line. So, separate
accounting was repealed and for the oil industry the state
adopted what is now called modified apportionment. By the time
the litigation reached the Alaska Supreme Court, the Container
Corporation decision had come down, which really resolved the
litigation in the state's favor. The Container Corporation had
very clear language that both separate accounting and
apportionment were means to the same end and that they both had
flaws, that they both had advantages, and that neither one was
unconstitutional.
3:34:48 PM
MS. VOGT explained that in adopting the modified apportionment
formula Alaska uses today, the state was attempting to find and
use apportionment factors that were better at accurately
apportioning production and pipeline transportation income than
the old three-factor formula. The state adopted two different
formulas. The production formula has a two-factor formula that
includes a property factor and an extraction factor. The
property factor still does not include the value of the
reserves, but the extraction factor is the number of barrels
extracted in the state's jurisdiction versus the number
worldwide. Pipeline transportation is a two-factor formula that
includes property and tariffs, or sales. At the time those two
were adopted, it was her understanding that production income
would be apportioned by the two-factor formula and the pipeline
by the other two-factor formula, but right away the companies
started using all three factors together for all of their
income. She understood, however, that now it is not just the
practice, it is the law, because the attorney general's office
has issued an opinion stating that that is the correct way to do
it. The difficulty with that is that a tariff factor is being
used to apportion production income, which is pretty silly, and
an extraction factor is being used to apportion pipeline
transportation income, which is also pretty silly. So, the
result is the modified apportionment, which has never really
worked very well.
MS. VOGT added that during her time with the state, the
effective tax rate for oil and gas taxpayers was always
somewhere around 3 percent rather than the 9.4 percent on the
books. She further mentioned that while Alaska at one time used
the so-called worldwide apportionment for all taxpayers, it
abandoned that method years ago for water's-edge apportionment
for everyone but the oil and gas industry. At the request of
the oil and gas industry, the modified apportionment stayed
worldwide.
3:37:21 PM
REPRESENTATIVE P. WILSON requested Ms. Vogt's opinion on what
would be the best for the State of Alaska to do.
MS. VOGT expressed discomfort at offering an opinion, but said
she has always felt that separate accounting more accurately
identifies the oil industry income than does any kind of
apportionment formula that has ever been figured out. However,
whether that should be adopted now, she could not say.
3:38:33 PM
CO-CHAIR SEATON observed that for fiscal year 2013 the fiscal
note includes no expenses for the four additional auditors and
travel, but it includes [$253,900] for fiscal year 2014, and
[$522,900] for fiscal years 2015 and thereafter.
MS. ROBYNN WILSON confirmed that this is correct.
CO-CHAIR SEATON asked whether the Department of Revenue would
consider an annual $500,000 investment with a $250 million
annual return to be a good cost-benefit ratio.
MS. ROBYNN WILSON replied she cannot speak to the cost-benefit
for that. She said the department is working on some revised
numbers that will be forthcoming.
CO-CHAIR SEATON maintained that that would be a much bigger
return than the state is getting on its investments in the
permanent fund or retirement system accounts and therefore it is
an effective and efficient use of state personnel.
3:40:53 PM
REPRESENTATIVE MUNOZ inquired how separate accounting would work
when expenses associated with the product are occurring over
more than one jurisdiction.
MS. ROBYNN WILSON qualified she was not with the state during
the administration of separate accounting, but said that in
looking at the bill as presented it is unclear how that would
work for multi-jurisdictional expenses. She thought it would
show up particularly with administration expense. If another
state apportioned it, that state would apportion the expenses as
well as the income.
CO-CHAIR SEATON pointed out that the courts specifically looked
at that and determined there were no significant issues. The
U.S. Supreme Court determined that separate accounting was
probably more accurate than apportionment formulas because
apportionment does not catch those things at all. It also
determined that separate accounting was not taxing profits that
were made in other jurisdictions. All transportation to the
market was allowed to be subtracted as a cost and profits made
at refineries were not collected back.
3:42:59 PM
CO-CHAIR SEATON asked whether the Department of Revenue would be
able to pull up the regulations that were implemented for
separate accounting so that they could be re-used.
MS. ROBYNN WILSON agreed to look into the status of those
regulations.
3:43:54 PM
CO-CHAIR FEIGE understood that if enacted, HB 328 would disallow
the oil companies from writing off expenses incurred in other
parts of the world. He inquired whether he is correct in
understanding that this would result in increasing the corporate
tax rate and hence the money that oil companies in Alaska would
pay to the state.
CO-CHAIR SEATON said this is not exactly correct. Under
separate accounting, any expenses associated with production in
Alaska could be taken off the corporate income tax; any expenses
unaffiliated with Alaska could not be used to write down profits
made in Alaska.
3:45:09 PM
CO-CHAIR FEIGE asked how HB 328 would put more oil into the
Trans-Alaska Pipeline System (TAPS).
CO-CHAIR SEATON responded it would put more oil in TAPS because
it does not incentivize companies to invest in other parts of
the world. Instead, it incentivizes companies to invest in
Alaska because any expense in Alaska is then an expense that
reduces their profit in Alaska.
3:46:04 PM
REPRESENTATIVE P. WILSON presumed that no oil company would like
this bill.
CO-CHAIR SEATON said he thinks Alaskan oil companies will see
the bill as fair because both they and their international
competitors would then be paying 9.4 percent tax. The state's
goal for a number of years has been to incentivize companies to
reinvest in Alaska, whether or not they are multi-nationals, as
well as to form oil companies in Alaska. He said he is very
happy that there are a number of oil companies that are located
only in Alaska and he thinks it unfair to tax those companies at
a higher rate than the international companies that are able to
dilute their Alaska profits.
[HB 328 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| HJR 32.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| CSHJR 32 Version D.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR 32 Hearing Request.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR 32 Sponsor Statement.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR 32 Fiscal Note.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HB0328A.PDF |
HRES 2/29/2012 1:00:00 PM HRES 3/16/2012 1:00:00 PM |
HB 328 |
| HB 328 Separate Accounting Sponsor Statement.pdf |
HRES 2/29/2012 1:00:00 PM HRES 3/16/2012 1:00:00 PM |
HB 328 |
| HB 328 Sectional Analysis.pdf |
HRES 2/29/2012 1:00:00 PM HRES 3/16/2012 1:00:00 PM |
HB 328 |
| HB328 Fiscal Note DOR.pdf |
HRES 2/29/2012 1:00:00 PM HRES 3/16/2012 1:00:00 PM |
HB 328 |
| Alaska Margins Slide.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| Legislative Research Report ConocoPhillips SEC 10K Filings.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| Atlantic Richfield Co v. State.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| PFC Energy Regime Competitiveness Slide.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| Separate Accounting Revenue Comparison.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| Petroleum News May 8, 2011 Eagle Ford Could Nudge Alaska for COP.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| CSHJR32 Version E.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR 32 Background Info List.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR 32 Comment - R. Rogers.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR32 Explanation of Changes.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR32 Introduction Testimony.pdf |
HRES 2/29/2012 1:00:00 PM |
|
| HJR32 Letter from USFWS Regional Director Haskett.pdf |
HRES 2/29/2012 1:00:00 PM |