Legislature(2011 - 2012)BARNES 124
03/16/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB328 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| += | HB 328 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 16, 2012
1:13 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Alan Dick
Representative Bob Herron
Representative Cathy Engstrom Munoz
Representative Berta Gardner
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Peggy Wilson, Vice Chair
Representative Neal Foster
COMMITTEE CALENDAR
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."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 328
SHORT TITLE: OIL AND GAS CORPORATE TAXES
SPONSOR(s): REPRESENTATIVE(s) SEATON
02/17/12 (H) READ THE FIRST TIME - REFERRALS
02/17/12 (H) RES, FIN
02/29/12 (H) RES AT 1:00 PM BARNES 124
02/29/12 (H) Heard & Held
02/29/12 (H) MINUTE(RES)
03/16/12 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
MICHAEL HURLEY, Director
Government Relations and Community Affairs
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 328.
MARIE EVANS, Tax Counsel
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Answered questions related to HB 328.
KARA MORIARTY, Executive Director
Alaska Oil & Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to HB 328.
DAN SECKERS, Vice Chair, Tax Committee
Alaska Oil and Gas Association (AOGA)
Anchorage, Alaska
POSITION STATEMENT: Answered questions related to HB 328.
ROBYNN WILSON, Income Audit Manager
Anchorage Office
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions related to HB 328.
JOHANNA BALES, Deputy Director
Anchorage Office
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions related to HB 328.
DEBBIE STOJAK, Assistant Attorney General
Commercial/Fair Business Section
Civil Division (Juneau)
Department of Law (DOL)
Anchorage, Alaska
POSITION STATEMENT: Answered questions related to HB 328.
ACTION NARRATIVE
1:13:10 PM
CO-CHAIR PAUL SEATON called the House Resources Standing
Committee meeting to order at 1:13 p.m. Representatives Dick,
Kawasaki, Herron, Feige, and Seaton were present at the call to
order. Representatives Munoz and Gardner arrived as the meeting
was in progress.
HB 328-OIL AND GAS CORPORATE TAXES
1:13:34 PM
CO-CHAIR SEATON announced that the only 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."
CO-CHAIR SEATON opened public testimony.
1:14:49 PM
MICHAEL HURLEY, Director, Government Relations and Community
Affairs, ConocoPhillips Alaska, Inc., stated his company opposes
the passage of HB 328. He said if the purpose of this proposed
change to separate accounting is simply to increase revenue from
the industry, ConocoPhillips Alaska, Inc. is unsure how that
improves the fiscal environment to attract the additional
capital investments needed to increase production in Alaska. In
regard to the philosophy of state income taxation, he noted that
ultimately any state income tax system must try to balance the
kind of taxation on businesses that have business in multiple
states. When dealing with multistate entities, a state must
figure out how to separate the income appropriate to the state,
and most states do that by utilizing an apportionment formula.
Each state looks at the attributes of the business in its state;
for example, how much payroll, or property, or sales the company
has in the state compared to all the states or jurisdictions
combined where the company does business. A fraction is then
created based on some combination of those attributes to
apportion the total income of the business into that particular
state. That avoids the problem of double taxation which can
occur when different states are trying to tax the same income
where the income is not easily determinable. That system has
become somewhat standardized through the Multistate Tax Compact,
a compact between the states that is overseen by the Multistate
Tax Commission, of which Alaska is a member. That is the system
Alaska has now, although it has a few tweaks in terms of how
Alaska does its apportionment factor.
1:17:24 PM
MR. HURLEY said separate accounting is the other methodology,
whereby the business is looked at separately for each state. He
said only 2 of the 45 states in which ConocoPhillips does
business use separate accounting; the other 43 all do some kind
of apportionment based on either the Multistate Tax Compact or
some other methodology. From a policy perspective, Alaska has a
worldwide apportionment system because the fraction is applied
against the total income of his company. An apportionment
factor is determined of how much divisible income is thought
apportionable to Alaska of ConocoPhillips Alaska, Inc.'s
worldwide income. That brings in things like the company's
refining assets in the Lower 48, distribution assets, and
upstream operations both in Alaska and in other places. He
pointed out that refinery and distribution income tends to be
countercyclical with oil and gas income. Upstream income varies
a lot with oil prices and, notionally, when oil prices are high
refining margins are low and when oil prices go down refining
margins go up. So, apportioning worldwide income catches both
sides of that balance for getting income taxable to the state.
That countercyclical nature tends to make Alaska's state income
tax much less volatile than, for example, Alaska's severance tax
and royalties that are very tightly tied strictly to oil prices.
1:20:02 PM
MR. HURLEY warned that if the state were to adopt the separate
accounting methodology proposed in HB 328, the state would in
essence be doubling down on oil prices. Alaska's royalty and
severance taxes are already tightly tied to oil prices, so going
to a separate accounting system would add another tax that is
highly volatile based on oil prices, rather than balanced out by
the other income sources that ConocoPhillips Alaska, Inc. has
throughout the country. He further pointed out that the current
apportionment system has considerable value to the state in the
ability of the Department of Revenue (DOR) to use the federal
income tax return, which is what the apportionment factor is
applied to as a basis for starting that apportionment
calculation. The federal rules regarding what constitutes a
deductible expense have long been debated and resolved between
taxpayers and the Internal Revenue Service (IRS). The state is
able to rely on federal audits of the taxpayer's revenues and
expenses, saving the state the cost of creating its own audit
staff and the grief of having to define all of those expenses,
credits, appreciation, and such. Reiterating his company's
opposition to HB 328, he said separate accounting would make the
state's overall fiscal regime more dependent on oil prices with
that inherent volatility and would require the creation of a
burdensome and costly system to administer.
1:22:19 PM
CO-CHAIR SEATON advised that HB 328 is not being put forward to
increase revenue. He said Alaska-only businesses, such as Great
Bear Petroleum LLC, Brooks Range Petroleum Corporation, and
UltraStar Exploration, are paying 9.4 percent on their profits
from Alaska. However, according to [consultant] Dan Dickinson
the international oil companies paid less than 9.4 percent every
year from 1982-1997. He asked why a worldwide player should be
allowed to pay a lower percentage on its corporate income tax
than an Alaska-only corporation.
MR. HURLEY allowed that may be true historically, but suggested
it is not always going to be the case. He said apportionment
factors tend to bring in other assets like countercyclical
refining and marketing assets, as well as the overseas assets of
worldwide companies. He suspected that if his company's
geographic breakdowns were looked at on its Form 10-K, it would
be found that the margins being taxed in other jurisdictions,
especially outside the U.S., are actually higher and therefore
Alaska is bringing in more income than it would if only Alaska
is looked at.
1:25:22 PM
CO-CHAIR SEATON countered that [the bill sponsors] had
Legislative Legal and Research Services look at the past 10
years, which includes years of both high and low oil prices, and
that factor was not seen. He offered to work with Mr. Hurley to
analyze that more and requested data be provided backing up Mr.
Hurley's aforementioned suggestion. Co-Chair Seaton added that
when separate accounting was in place from 1975-1981 there was a
definite washout of taxes to overseas less profitable ventures
and this was also the same every year from 1982-1997. Going
back to 2006, the corporate income tax paid by the highest
aggregate of the five largest taxpayers in the state was 5 and 6
percent, except for 2006 which had a slight amount. While he
understood Mr. Hurley theoretically, he said that has not
actually taken place regardless of whether the worldwide price
was high or low.
MR. HURLEY agreed to supply the data for his company. He
recalled that Mr. Dickinson's data went back to the late 1970s
and said that while the discrepancy in the numbers was pretty
big, it fell off quite a bit in the latter part of Mr.
Dickinson's analysis.
CO-CHAIR SEATON said Mr. Dickinson's analysis went through 1997
and [the discrepancy] was $96 million in 1997, the second lowest
year.
MR. HURLEY replied that is what he would expect to see.
1:28:55 PM
CO-CHAIR SEATON noted that Mr. Hurley's company participates in
the North Dakota jurisdiction, a jurisdiction that adds a surtax
of 3.5 percent to its 5.15 percent tax for those companies
electing the taxation method of water's edge. Therefore, he
concluded, North Dakota obviously had the same experience that
apportionment definitely reduces its revenue amounts. He
understood that North Dakota increases its corporate income tax
by 60 percent for a company electing apportionment instead of
separate accounting.
MR. HURLEY responded he did not know which method his company
uses in North Dakota, but said he will find out and get back to
the committee.
1:31:26 PM
CO-CHAIR FEIGE related that one argument for going back to
separate accounting is that companies wanting to reduce their
corporate tax liability against their significant incomes
generated in Alaska would come up with deductions to balance
that out; thus, separate accounting would result in more
investment being made in Alaska. He asked whether that presumed
effect would be true for ConocoPhillips.
MR. HURLEY answered he is unsure that that particular form of
the tax would have that much of an impact on investment
decisions in terms of the portfolio of in Alaska versus other
places. As a large multi-national corporation, ConocoPhillips
pays state income tax in 45 different states and most of them
use apportionment. Therefore, most other states are taxing some
portion of his company's Alaska income, whether the company uses
water's edge or worldwide. Therefore, the amount paid to the
State of Alaska does not represent all of the state income tax
that ConocoPhillips pays on its Alaska income. One of the
theoretical concepts behind apportionment is that if everybody
tries to get the right percentage, and taxes the common pool of
income, there should not be double taxation and everybody gets
the right amount for the business in each state. In the perfect
world every state would use the same pot of income and would
have the same apportionment factors so there would be no double
taxation. However, it does not work that way because some
states like to double up on the sales factor and Alaska uses an
extraction factor not used by any other state. When talking
about how much state income tax ConocoPhillips pays on its
Alaska income, only part may be paid to the State of Alaska but
the company is also paying income taxes at the state level on
Alaska income to other states. So, when evaluating investments
in Alaska, ConocoPhillips must evaluate the impact of that
investment on its Alaska state income tax as well as all those
other states where the income generated from that investment
will be taxed.
1:35:36 PM
CO-CHAIR SEATON directed attention to the 3/9/12 memo in the
committee packet from [consultant] Roger Marks which states that
at the national level the tax is, in all cases, calculated on a
separate accounting basis. Co-Chair Seaton asked how it is that
all the other jurisdictions are doing separate accounting but
not Alaska. He asked Mr. Hurley to relate that to how Alaska is
getting an apportionment of the revenue generated in those
jurisdictions.
MR. HURLEY replied he was talking about state income taxes
within the U.S.
CO-CHAIR SEATON said he realized this, but separate accounting
is the topic, plus Alaska has worldwide apportionment, not
water's edge apportionment. Most jurisdictions have separate
accounting, except Alaska. He asked Mr. Hurley to state why it
works or does not work for ConocoPhillips to pay separate
accounting in Norway and worldwide apportionment in Alaska.
MR. HURLEY responded ConocoPhillips is getting double taxed on
some of its Norway income because Alaska is drawing in some of
the Norway income and taxing it as part of the company's
worldwide income base, but vice versa is not true.
1:37:56 PM
CO-CHAIR SEATON said HB 328 would prevent double taxation by
doing separate accounting. Norway would tax the income and
expenses there and Alaska would tax the income and expenses
here, which would eliminate any possibility of double taxation.
He urged Mr. Hurley to provide diagrams supporting what
ConocoPhillips is saying. Co-Chair Seaton allowed Mr. Hurley
may be right because Alaska allows costs to come in and be
written off Alaska income. He understood Mr. Hurley to be
saying that this would be a tax increase if Alaska was taxing
the revenue [in Norway] and if [Norway] was the same
profitability as Alaska. He said his perspective is that Alaska
is reducing its corporate income tax to subsidize less
profitable overseas investments. As the bill sponsor he is
trying to get oil companies to invest in Alaska and take that as
an expense instead of investing in other places and taking those
as expenses.
1:40:41 PM
CO-CHAIR FEIGE surmised that the more jurisdictions using one
type of taxation system, the less the double taxation.
MR. HURLEY concurred, adding that the reason for the Multistate
Tax Compact is to try to get some kind of uniformity between the
states.
1:41:36 PM
CO-CHAIR FEIGE noted Alaska taxes all companies operating in the
state under the Multistate Tax Compact. He said the small
explorers in Alaska do not have any income so they do not pay
any corporate income tax. Excepting Pioneer Natural Resources
Company and Buccaneer Energy, it is the large international
corporations that at this point are the producers. Under
separate accounting the international companies may or may not
pay more corporate income tax, but they are paying a significant
amount of production tax, which the other companies are not. In
terms of total overall contribution, he asked how much
ConocoPhillips pays in production tax.
MR. HURLEY believed ConocoPhillips paid $5 billion in taxes and
royalties [in 2011].
MARIE EVANS, Tax Counsel, ConocoPhillips Alaska, Inc., said she
will look at the company's Form 10-K and get back to the
committee with an exact answer.
CO-CHAIR SEATON noted the committee has a copy of the Form 10-K
and therefore has the information.
1:44:40 PM
REPRESENTATIVE HERRON recollected that in 1985 all but 19 states
used some form of separate accounting and he presumed the
Multistate Tax Compact had something to do with that. He said
the Alaska State Legislature abandoned separate accounting in
1981, but talked about it again in 1985 when revenue was at a
low point. He asked whether this type of legislation has not
found its time yet because revenue is not low.
MR. HURLEY suggested it is a policy call about how to make that
definition rather than a question of whether it has found its
time. While he understood the intellectual argument for going
with separate accounting, he said that from a policy perspective
it has its downsides. Those downsides are the increased cost
and grief of administering it because the state would be unable
to rely on the IRS to do some of that for it. Additionally, it
would tie the state much more to oil prices, which would make
the State of Alaska's revenue stream that much more volatile.
1:47:03 PM
REPRESENTATIVE HERRON noted that the legislature came back to
separate accounting in 1985 because the revenue stream was
really low. He asked whether the political reality is that this
bill is at the wrong time because the state is enjoying high
revenue. He further asked whether the state should go back to
separate accounting at a time in the future when revenue is low.
MR. HURLEY answered that that would be exactly the wrong time to
go to separate accounting. The state's revenue stream would be
much reduced because it would be unable to draw in the refining
and marketing pieces of the business that tend to balance out
the low crude price in the state income tax under apportionment.
1:49:02 PM
CO-CHAIR SEATON agreed the aforementioned is a good theoretical
argument, but said this has not happened in actuality according
to the analyses he had performed, even when prices in Alaska
were really low. He asked whether Alaska can be compared to the
other states since they use water's edge and Alaska uses
worldwide apportionment.
MR. HURLEY admitted it is an imperfect system, given different
states have different apportionment factors and some use water's
edge.
MS. EVANS, responding to Mr. Hurley, offered her belief that
some states have worldwide apportionment, although she could not
recall which ones.
MR. HURLEY, continuing, said the other states have different
apportionment factors, and different weighting between the
apportionment factors, regardless of whether the income bucket
is water's edge or worldwide. The Multistate Tax Compact was an
effort to reach some uniformity, but that has not been reached.
1:51:22 PM
CO-CHAIR SEATON inquired how much of a problem it is for
ConocoPhillips in the three other states that have separate
accounting versus apportionment.
MR. HURLEY related that he recently talked with some of his
company's state income tax people who said it is quite a problem
trying to do separate accounting states and it is a lot of work
to fill out the returns for those states. He added that the
apportionment states, for the most part, work off the same
bucket of income that is already audited by the IRS and it is
fairly consistent in the accounting system. A problem with
separate accounting is that each state has a slightly different
definition of expenses and a different way of treating corporate
interest, which is done at the corporate level rather than at a
particular business unit level within a state. These different
allocations make it an extremely time-consuming exercise for the
company as well as the state's regulators.
CO-CHAIR SEATON presumed it is a little bit more difficult
because the Lower 48 fields may be integral between some states
rather than segregated by 1500 miles like they are in Alaska.
MR. HURLEY concurred.
1:54:05 PM
MS. EVANS pointed out that, in terms of compliance, company
staff makes a judgment call and files the forms, but there is
then a whole other regulatory entity making another judgment
call. After that there is the reconciling of those judgment
calls and if that does not happen there is litigation. Thus,
separate accounting is difficult.
CO-CHAIR SEATON noted the State of Alaska has been through
litigation on separate accounting.
MS. EVANS said her company has, too, but not in Alaska.
CO-CHAIR SEATON added that the discussion is not about whether
separate accounting is legal, but rather is a policy issue.
MR. HURLEY concurred that that has been resolved, but said the
question is in the details of filing a tax return and trying to
determine a department's interpretation of what is an expense
versus what the company thinks is an expense.
1:55:45 PM
CO-CHAIR SEATON specified that HB 328 is drafted on the previous
separate accounting that Alaska had. He pointed out that some
things have changed, however, and the rules for depreciation
that the companies work under in Alaska are the 1981 federal
rules rather than current federal rules. So, unlike before, a
company would be unable to marry its tax and write a check.
MR. HURLEY concurred.
CO-CHAIR SEATON presented a hypothetical scenario in which
Alaska adopts separate accounting and has a full write-off of
expenditures in the first year instead of a depreciation
schedule spanning many years. He asked whether that would be
seen as beneficial and simpler to implement for the calculation
of income tax.
MR. HURLEY agreed it would be a simplification that would reduce
the level of administrative burden.
1:59:46 PM
CO-CHAIR SEATON asked whether Mr. Hurley has any comments on the
presentations by Mr. Roger Marks.
MR. HURLEY answered not at this time because this afternoon is
the first he has seen them.
CO-CHAIR SEATON said he will leave public testimony open so Mr.
Hurley can come back to share his thoughts in this regard, as
well as any other data he would like to present.
2:00:54 PM
CO-CHAIR SEATON distributed an amendment related to education
tax credits, labeled 27-LS1142\B.1, Nauman, 1/24/12, for
committee members to review. He explained there is no intention
to eliminate the education tax credits by going to the proposed
separate accounting, but including them in the bill would have
doubled the length of the bill and made it severely complicated
to read. He therefore chose to split out the education tax
credits in the form of an amendment.
CO-CHAIR SEATON invited the Alaska Oil and Gas Association to
testify next.
2:03:18 PM
KARA MORIARTY, Executive Director, Alaska Oil & Gas Association
(AOGA), explained that AOGA is a business trade association with
the mission to foster the long-term viability of the oil and gas
industry in Alaska for the benefit of all Alaskans. She said
AOGA's member companies account for the majority of oil and gas
exploration, production, transportation, refining, and marketing
activities in Alaska. Further, AOGA's members reflect the
breadth and scope of the industry across the state. She
emphasized that her testimony today on HB 328 reflects a 100
percent consensus of AOGA's diverse membership. She explained
that when AOGA testifies on matters of tax policy it is required
that it have a 100 percent consensus of its members.
MS. MORIARTY said AOGA opposes HB 328, which would re-impose the
separate accounting income tax that Alaska had for oil and gas
companies from 1978-1981. Effective with the 1982 tax year,
Alaska abandoned separate accounting in favor of the present oil
and gas corporate tax found in AS 43.20 and, in particular, AS
43.20.072, which uses apportionment. Noting that separate
accounting and apportionment are terms of art in the context of
taxing multistate and international businesses, she said she
will describe what each one is, how it works, and the relative
strengths and weaknesses of each.
2:05:18 PM
MS. MORIARTY began a PowerPoint presentation, saying that
separate accounting and apportionment both seek to answer the
same question [slide 1]: How much income of a multistate or
international business is properly attributable to its in-state
assets and activities so it can be taxed by that state? This is
the question the committee is trying to answer with corporate
income taxes.
CO-CHAIR FEIGE inquired whether it would be more proper to say
how much net income.
MS. MORIARTY replied it could, but it is just how much income.
MS. MORIARTY, continuing her testimony [slide 2], said separate
accounting takes the approach of looking at "what the business
actually has and does in the state and then seeks to determine
directly the net-income as if that in-state portion of the
business stood alone - separate from the rest of the business."
Conceptually, separate accounting seems to tackle the question
of how much income is made by the in-state portion of a multi-
jurisdictional business. However, appearances can be misleading
and separate accounting has some challenges.
2:06:36 PM
MS. MORIARTY said one challenge [slide 3] is that the "in-state
portion of such a business does not actually stand alone from
the rest of the business. Whether the overall business is
conducted with a single corporate entity or through a unitary
web of closely and carefully coordinated affiliates, the
opportunities are often present for the in-state portion to
engage in business transactions with the out-of-state portions
that technically are completely legal and proper, but which have
the effect of shifting income and expenses, gains and losses,
into and out of the in-state part of the overall business."
MS. MORIARTY illustrated how difficult it can be to unravel
transactions between or among parts of the same overall business
by pointing out that regulations have been adopted under the
Internal Revenue Code to "control artfully created tax
opportunities" within such a business. She said Section 13 of
Treasury Regulation 1.1502 is 70 single spaced pages and that
"this mammoth regulation establishes the general principles for
unraveling various tax effects otherwise created artfully by
transactions between or among affiliated corporations."
Sections 14, 15, and 16 apply and adapt those general principles
to specific kinds of businesses or specific kinds of
transactions. These regulations run in numerical order all the
way out to 100, showing how complicated it can get when
unraveling transactions between corporate affiliates as required
by separate accounting.
2:08:58 PM
MS. MORIARTY explained that in contrast, apportionment "starts
with a 'pie' containing the apportionable income for the in-
state and outside business together and then determines how wide
the 'slice' is attributable to the income-generating potential
of the in-state portion of the business [slide 4]. It is the
'slice' that is then taxed by that state. This avoids the need
to unravel transactions across parts of the overall business and
it avoids the analytical difficulties that arise when a unitary
business as a whole is greater than the sum of its individual
parts [slide 5]. The key assumption underlining apportionment
is that overall a dollar invested in-state has the same income
generating potential as the dollar invested anywhere else, that
a dollar of sales has the same potential as the dollar of sales
elsewhere, that a worker in-state is as productive per dollar of
wages and benefits as a worker outside, that a barrel of oil or
its equivalent of a gas produced in-state represents comparable
potential for profitability as one produced someplace else, or a
similar assumption about comparable in-state and everywhere else
potential as measured by a similar business attribute or
indicator. So, the bottom line is for oil and gas producers and
pipeline companies and their affiliates that are doing business
in Alaska, the width of the Alaska slice of their respective
business's pie is the average of the percentages of that
business's real or tangible property or cost, its sales, and its
oil and gas production that is present in Alaska."
2:10:47 PM
MS. MORIARTY noted that "after laying out this key economic
assumption underlying and justifying apportionment methodology,
the Alaska Supreme Court continued in 1985 that 'These factors
are merely indicative of the business income producing
capabilities. They are not intended to reflect the business's
precise sources of income for any particular year. The factors
in an apportionment formula represent an attempt to relate the
taxpayer's presence within the state to its presence elsewhere.'
So, what all the theory and economics boils down to is this:
For any given taxpayer, the question of whether its Alaskan
income tax will be greater under separate accounting than under
apportionment depends on whether the actual profitability of its
Alaska business is greater overall than the actual profitability
of the combined in-state and outside business as measured by the
per dollar invested per sales sold and per barrel produced. If
the in-state part of the business is materially superior by
these standards than the combination, it wants apportionment as
the lesser tax; if materially inferior it prefers separate
accounting."
2:12:16 PM
MS. MORIARTY reminded members that AOGA represents a wide range
of oil and gas companies, so the aforementioned means that
certain oil and gas taxpayers can start out preferring separate
accounting because they would pay less tax than under
apportionment; others will start out preferring apportionment.
The side of the line that a particular company falls on depends
on its own circumstances. There is nothing inherent about
separate accounting that causes the taxpayer's tax to be greater
than that taxpayer's tax with apportionment. However, something
inherent about a non-renewable resource like oil and gas is that
no matter how long an oil company may initially start out
preferring apportionment over separate accounting as the lesser
tax, there will eventually come a day when its oil and gas
resources in Alaska will become sufficiently depleted that
separate accounting will become the smaller tax for that
business. Therefore, AOGA believes it premature to restructure
Alaska's corporate income tax. Also, depending on how Alaska
structures the rest of its overall tax regime, which the
legislature is currently debating, the enactment of separate
accounting at this time could turn out to be a self-fulfilling
prophecy in terms of hastening the crossover for more and more
members of the industry in Alaska. That is particularly likely
if separate accounting is enacted as part of an overall tax
structure and policy of merely taking more money from the
industry instead of optimizing the opportunities. There is a
sweet spot between having 100 percent of nothing or 0 percent of
everything; there is a sweet spot between these two extremes
where the tradeoff is optimized between the size of one share
and the size of what there is to be shared. She said AOGA
believes that Alaska has too high a government take and has
already overshot the mark in terms of the size of the state's
share. Enacting separate accounting to increase the state's
share would be a further mistake. She reiterated that AOGA
opposes HB 328.
2:15:26 PM
CO-CHAIR SEATON disputed the assumption that the pie can be
split because labor produces the same amount of revenue and
costs the same regardless of location. He said labor was
totally taken out of the formula because it was so problematic
of not yielding the same. Although there is the theoretical of
what apportionment is supposed to do, apportionment has already
been rejected on the basis of the three portions talked about by
Ms. Moriarty. Apportionment would work if profitability around
the world was the same, but this is not the case. According to
publically released data, Alaska is more profitable than many
other jurisdictions, which results in Alaska lowering its income
tax to subsidize round-the-world investments.
MS. MORIARTY replied that as a trade association AOGA is
prohibited from talking about the profits and sales of its
member companies. However, she said, as a tax policy this is
the difference between separate accounting and apportionment
from a theoretical standpoint.
2:18:30 PM
CO-CHAIR SEATON noted that Alaska is doing worldwide
apportionment and many of the jurisdictions being dealt with on
that apportionment are doing separate accounting. For example,
Norway has separate accounting and several companies doing
business in Alaska are also doing business in Norway. He asked
how those two things would interact.
MS. MORIARTY responded she does not know the specifics of the
Norway tax structure and she is not a tax expert, but when
AOGA's member companies looked at this bill as a whole, they
preferred the current system.
2:19:27 PM
REPRESENTATIVE HERRON inquired whether Ms. Moriarty is saying
that the state's potential revenue would be less for production
from the outer continental shelf (OCS).
MS. MORIARTY answered she is saying that HB 328 would affect the
companies that are currently operating on state lands; not that
companies would make less on offshore and she will get back to
the committee in this regard. Member companies, she continued,
must look at her testimony before she can testify and the member
companies operating in the offshore did not have a problem with
opposing HB 328.
2:20:36 PM
REPRESENTATIVE GARDNER said she was struck by Ms. Moriarty's
description of the federal tax code as it would apply for
separate accounting. She asked what industries this code
applies to and how it works for them.
MS. MORIARTY, responding first to Co-Chair Seaton, confirmed she
was talking about the tax code for separate accounting. In
response to Representative Gardner, she understood that this
federal tax code would apply to any consolidated business, not
just oil and gas companies that have consolidated businesses.
REPRESENTATIVE GARDNER presumed someone must be using this
federal tax code, so it must be fairly doable or the code would
not have happened at all.
MS. MORIARTY replied she is saying it is very tenuous and
complicated to separate those costs, but not impossible.
2:22:04 PM
REPRESENTATIVE MUNOZ requested Ms. Moriarty to comment on an
earlier statement that Alaska's financial picture becomes more
volatile with separate accounting when prices are low.
MS. MORIARTY responded that when prices are low the profits are
going to be lower.
REPRESENTATIVE MUNOZ understood that, but asked why revenue to
the state would be more volatile with separate accounting.
MS. MORIARTY deferred to AOGA's tax attorney, Mr. Dan Seckers,
for further response.
DAN SECKERS, Vice Chair, Tax Committee, Alaska Oil and Gas
Association (AOGA), concurred with ConocoPhillips that revenue
to the state would be more volatile at lower prices. He said
the principle reason is that under worldwide apportionment there
are the attributes of other income from the business that are
not so price sensitive that can buffer a low price scenario that
could occur in Alaska. Under separate accounting, the Alaska
income would be driven by price and therefore when prices go
down the income that Alaska would see would go down.
MR. SECKERS, addressing Representative Herron's question about
the OCS, explained that the OCS income would not be taxed by the
State of Alaska because it is outside of the state. Therefore,
separate accounting would not bring in much of the income from
OCS, whereas apportionment would. In response to Co-Chair
Seaton, he confirmed that the entire organization of AOGA is
unanimous in Ms. Moriarty's testimony.
2:24:34 PM
REPRESENTATIVE GARDNER, in regard to the statements that
Alaska's income would be more volatile under a low price
scenario with separate accounting, asked whether it would also
be true to say that it would be less volatile at high prices.
MR. SECKERS replied that at high prices the overall worldwide
income of the company would also hopefully be doing very well
and therefore the pie would be bigger that Alaska would have a
portion to. So, it is not necessarily a clear cut yes or no
answer that separate accounting would be any worse off when
prices are really high.
2:25:39 PM
CO-CHAIR SEATON pointed out that a company could own different
types of businesses and some of those businesses could be
countercyclical to oil prices, which under worldwide
apportionment would make for less volatility. However, a
company owning only upstream oil and gas is very price
dependent, so the volatility would probably be exactly the same.
He asked whether he is correct in this understanding.
MR. SECKERS confirmed this to be correct. He said a buffer is
provided when an integrated oil company owns downstream,
upstream, chemical, and other businesses, which is why modified
apportionment provides a more stabilized corporate income tax
stream to the state.
2:27:31 PM
REPRESENTATIVE HERRON presumed that around the world some
jurisdictions have apportioned accounting and some have separate
accounting.
MR. SECKERS confirmed the aforementioned.
REPRESENTATIVE HERRON inquired what the advantage is to Mr.
Seckers' company [ExxonMobil Production Company] to have
separate accounting in those jurisdictions.
MR. SECKERS responded he is present to speak as one voice
through AOGA and therefore he cannot speak on behalf of a member
company. He offered to get back to members on the question.
CO-CHAIR SEATON requested Mr. Seckers to also get back to the
committee on the North Dakota example of separate accounting and
water's edge apportionment and how the many of [ExxonMobil
Production Company] businesses in North Dakota use separate
accounting and how many use water's edge.
MS. MORIARTY replied AOGA would get back to the committee to the
best of its ability.
2:29:26 PM
REPRESENTATIVE GARDNER asked whether there are other regimes
around the world that give companies the option of selecting a
tax method and how the companies decide which method to select.
MS. MORIARTY answered AOGA will try its best to get back to the
committee on that.
REPRESENTATIVE DICK surmised a more accurate tax is what is
being asked for. While there are disadvantages to doing
business in Alaska, there must also be advantages because the
profitability in Alaska seems to be greater than in other
places. Therefore it is a matter of finding the sweet spot for
taxation.
2:32:14 PM
CO-CHAIR SEATON drew attention to the 3/9/12 memorandum from Mr.
Roger Marks, noting it states that almost every other
jurisdiction around the world uses corporate income tax at the
national level based on separate accounting rather than
worldwide apportionment. A couple of different mechanisms are
used and almost all have an income tax. Two jurisdictions, the
U.S. and Canada, have corporate income tax at the sub-national
level. He said he has been unable to find any other state
besides Alaska that does worldwide apportionment; the other
states do water's edge, meaning only within the U.S. itself.
Alaska's current tax, depreciation schedules, and regulations
are based on the 1981 federal income tax and not on the current
federal income tax.
2:34:55 PM
CO-CHAIR FEIGE inquired whether the federal government uses
separate accounting or apportionment.
CO-CHAIR SEATON replied that according to Mr. Roger Marks all
the national levels deal with separate accounting.
CO-CHAIR FEIGE asked whether every country in the world uses
separate accounting.
CO-CHAIR SEATON paraphrased from page 1, paragraphs 2 and 3, of
the 3/9/12 memorandum by Mr. Marks, which states [original
punctuation provided]:
At the national level, of the 57 countries in BP's
1
2011 "Statistical Review of World Energy" that produce
either a minimum of 80,000 barrels per day of oil, or
0.1 billion cubic feet per day of gas (see attached),
2
nearly all of them impose a corporate income tax.
(Iran, Libya, Mexico, and Trinidad and Tobago do not.)
At the national level, in all cases the tax is
calculated on a separate accounting basis....
2:35:57 PM
CO-CHAIR SEATON, responding further to Co-Chair Feige, confirmed
that those 57 countries are oil producing countries. He said
the memorandum from Mr. Marks was in response to the committee's
questions and the committee did not include a question about
what non-oil producing countries do. He inquired whether Co-
Chair Feige would like to ask that question of Mr. Marks.
CO-CHAIR FEIGE affirmed he wishes to ask that question, saying
it is pertinent because a company will have some areas in which
it makes more income and has more expenses than in others. It
is to an oil producing country's advantage to institute separate
accounting. However, for non-oil producing countries, but in
which oil companies operate, worldwide accounting would be used
to tap into some of those profits. Therefore, it appears that
each country is using the system that is to its best advantage.
2:36:59 PM
CO-CHAIR SEATON agreed to ask that question of Mr. Marks, but
added he thinks it is difficult to tax something that a country
has no relationship to the production of. He concurred it is to
an oil producing country's advantage to use separate accounting,
which is why HB 328 is before the committee.
CO-CHAIR FEIGE maintained the aforementioned analogy is skewed
because it does not look at all the countries in the world, it
looks only at the oil producing countries. Responding further
to Co-Chair Seaton, he said he would like to ask the question,
"What do all the countries in the world use as far as an
accounting system?" He pointed out that just about every
country in the world has an oil company operating in it because
there are cars in most countries. In further response to Co-
Chair Seaton he agreed to write out the question and clarified
he is asking about corporate income tax, not oil production.
2:39:15 PM
CO-CHAIR FEIGE surmised that changing from Alaska's current
corporate tax structure to a separate accounting structure would
entail a significant increase in manpower and time devoted to
the accounting for the different system. He asked how much more
resources, people, and money would be needed to institute
separate accounting.
ROBYNN WILSON, Income Audit Manager, Anchorage Office, Tax
Division, Department of Revenue (DOR), replied the DOR fiscal
note shows four additional positions because HB 328 would
essentially put the income into two baskets of an oil and gas
company, and that is the separately-accounted-for production
income which is on a state specific basis. Therefore, certain
expenditures are allowed as expenses and certain are not, but
[HB 328] has no real definition of those expenses. The rest of
the business is then apportioned on a federal income tax basis.
Instead of apples and apples, [HB 328] would be apples and
oranges. The particular difficulty would be with intercompany
transactions. Under the current system Alaska piggybacks off
the federal rules where those rules are set up under specific
rules. For example, an intercompany might have engineering
expenses that one part of the business is providing to the
production part of the business, but under HB 328 DOR would not
know how to account for those. Further, DOR cannot rely on the
Internal Revenue Service (IRS) to audit to the invoice level, so
for those companies DOR auditors would have a lot more work
auditing down to the invoice level.
2:42:12 PM
CO-CHAIR FEIGE inquired whether DOR could keep up with that with
four more people.
MS. WILSON responded this is DOR's best estimate on its first
look at the bill and it is continuing to evaluate resources.
CO-CHAIR FEIGE remarked that a company would be able to employ
its own accountants to generate the transactions for legally
shifting monies to the company's advantage. He asked how much
additional work that would entail for DOR versus what the
department has to do now.
MS. WILSON answered it would be a tremendous amount of work
because DOR must look into intercompany transactions as well as
such things as transfer pricing between parts of the business.
Articles in the Wall Street Journal have reported on problems
that even the federal government has with auditing transfer
pricing. These problems include companies accounting for
revenues such that income shows up offshore in different foreign
corporations and escapes federal taxation. Problems include
transfer prices, intercompany transactions, lack of definitions
in the bill for expenses, and so on.
2:44:15 PM
JOHANNA BALES, Deputy Director, Anchorage Office, Tax Division,
Department of Revenue (DOR), interjected that even within
water's edge transfer pricing can be used to shift income
offshore, and transfer pricing is one reason why a lot of the
states that require apportionment went to a worldwide. She
further noted that North Dakota requires worldwide apportionment
and does not have separate accounting; a company can elect to do
water's edge in North Dakota, but it then pays a premium and the
reason for that is because of the intercompany transactions and
the transfer pricing. North Dakota requires worldwide formulary
apportionment, she reiterated, just like Alaska.
2:45:30 PM
MS. WILSON added that the states using water's edge, in general,
struggle with the same problems the federal government does, but
they do it in a different way. She understood that, in general,
there is some political push in other states to go to water's
edge rather than worldwide apportionment. The reason for
water's edge as opposed to worldwide is that states then suffer
when there is income reported in the foreign entities that they
cannot pick up on their combined report, which is very similar
to what the U.S. government struggles with as activities and
profits are reported, then, by foreign corporations rather than
domestic corporations. Domestic corporations pay income tax on
all activities; it is not on a separate accounting basis for the
U.S. She further clarified that separate accounting is a term
of art that does not mean separate corporate accounting. The
U.S. federal government taxes corporations as a person - as a
taxable entity; it does not subdivide within that corporate's
books to do separate accounting, which is a geographic
determination, not a legal entity.
2:47:55 PM
CO-CHAIR FEIGE inquired why the State of Alaska did not go back
to separate accounting when the courts ruled in the state's
favor in the mid-1980s.
MS. BALES replied she and Ms. Wilson have been with the state 19
and 17 years, respectively, so that history predates both of
them. She and Ms. Wilson understood it was a policy decision
not to return to separate accounting. In further response to
Co-Chair Feige, she agreed to research why that policy decision
was made.
2:49:42 PM
REPRESENTATIVE DICK conjectured that the dynamic was quite
different that many years ago. While it might be to the state's
advantage to do separate accounting today, it may not have been
that way back then.
REPRESENTATIVE HERRON recalled a 1981 coup in the Alaska's House
of Representatives and said that immediately following that coup
the state abandoned separate accounting. In response to Co-
Chair Seaton, he maintained that it was a policy decision.
2:51:18 PM
CO-CHAIR FEIGE asked whether there would be a chance of
litigation if the state were to change its taxing method.
DEBBIE STOJAK, Assistant Attorney General, Commercial/Fair
Business Section, Civil Division (Juneau), Department of Law
(DOL), responded the area of taxation is wrought with
controversy. Multiple changes have occurred within and outside
the state since the last supreme court case involving the change
to separate accounting - the Multistate Tax Commission being one
change outside the state and within Alaska there has been a
total change to the state's production tax. Given these state
and federal changes, she said "imaginative" lawyers could think
of theories that would amount to challenges of a change to
separate accounting. In further response, she said she cannot
definitively say the state would get sued, but that she can
certainly imagine a challenge. Given it was challenged back
then, it is very likely that it could be challenged if the
change is made again.
2:52:58 PM
CO-CHAIR SEATON recalled that separate accounting was upheld by
the Alaska Supreme Court. The U.S. Supreme Court dismissed it
saying there were no constitutional or federal statutory issues.
Therefore, at this point in time, this is where the state is at.
MS. STOJAK concurred the aforementioned is correct in terms of
that specific litigation.
[HB 328 was held over.]
2:54:19 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:54 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 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 |
| marks seaton sa list - rev.docx |
HRES 3/16/2012 1:00:00 PM |
HB 328 |
| Mississippi, Oklahoma, and North Dakota Tax Information.pdf |
HRES 3/16/2012 1:00:00 PM |
HB 328 |
| Separate accounting comparison.pdf |
HRES 3/16/2012 1:00:00 PM |
HB 328 |
| April_21_2012_Alaska_House_Resources_Committee.pptx |
HRES 3/16/2012 1:00:00 PM |
HB 328 |