Legislature(2011 - 2012)BARNES 124
04/06/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Discussion(s): 7-day Commercial Fishing Crewman's License | |
| HB328 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| += | HB 328 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 6, 2012
1:04 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Alan Dick
Representative Neal Foster
Representative Bob Herron
Representative Cathy Engstrom Munoz
Representative Berta Gardner
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
DISCUSSION(S): 7-DAY COMMERCIAL FISHING CREWMAN'S LICENSE
- HEARD
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
SENATE BILL NO. 192
"An Act relating to the oil and gas production tax; and
providing for an effective date."
- SCHEDULED BUT NOT HEARD
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
03/16/12 (H) Heard & Held
03/16/12 (H) MINUTE(RES)
03/28/12 (H) RES AT 1:00 PM BARNES 124
03/28/12 (H) Heard & Held
03/28/12 (H) MINUTE(RES)
04/06/12 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
MIKE MONAGLE, Director
Central Office
Division of Workers' Compensation
Department of Labor & Workforce Development (DLWD)
Juneau, Alaska
POSITION STATEMENT: Answered questions during the discussion on
7-Day Commercial Crewmember's License.
JOHANNA BALES, Deputy Director
Anchorage Office
Tax Division
Department of Revenue (DOR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
328.
ACTION NARRATIVE
1:04:20 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:04 p.m. Representatives Feige,
Seaton, Herron, P. Wilson, Kawasaki, Gardner, Dick, and Foster
were present at the call to order. Representative Munoz arrived
as the meeting was in progress.
^DISCUSSION(S): 7-Day Commercial Fishing Crewman's License
DISCUSSION(S): 7-Day Commercial Fishing Crewman's License
1:05:19 PM
CO-CHAIR FEIGE announced the committee would hear discussion on
an issue pertaining to the Fisherman's Fund Advisory and Appeals
Council. The issue deals with nonresident 7-day crewmember
fishing licenses.
1:05:59 PM
CO-CHAIR SEATON directed attention to a letter in the committee
packet dated 4/4/12 from James Herbert, representative of the
Fishermen's Fund Advisory and Appeals Council. Mr. Herbert's
correspondence was in response to the committee's inquiry as to
the effect of $30, nonresident, 7-day commercial fishing
licenses on the fees for insurance coverage collected by the
Fishermen's Fund, Division of Workers' Compensation, Department
of Labor & Workforce Development. An attachment to the letter
provided analysis from 2004-2011, which showed the growth in the
number of nonresident, 7-day crewmember licenses to 2,296 sold
in 2011. Representative Seaton explained the issue is whether
revenue to the state from the sale of short-duration licenses is
sufficient to pay the cost of insurance coverage, which is the
same as for a full-price license. The original intent of the 7-
day license was to provide an economic incentive for "dude
fishing" aboard a commercial fishing vessel. Although that
economic potential has not been realized, over 2,000 short-term
licenses have been sold in lieu of full-price licenses. In
fact, in a short season fishery like Bristol Bay, a nonresident
commercial fisherman could buy consecutive 7-day licenses and
avoid paying the intended price. He concluded that this
discussion is to inform the committee, the public, and state
agencies of this situation, and no action is recommended at this
time.
REPRESENTATIVE GARDNER referred to the attachment and asked how
sales expenses are calculated.
CO-CHAIR SEATON expressed his belief that the sales expense is
about 10 percent and goes to the vendor selling the license.
1:11:13 PM
MIKE MONAGLE, Director, Central Office, Division of Workers'
Compensation, Department of Labor & Workforce Development
(DLWD), informed the committee he is also the commissioner's
designee and chair of the Fisherman's Fund Advisory and Appeals
Council. Mr. Monagle said he did not know the answer to
Representative Gardner's question, however, the Fisherman's Fund
gains one percent of each commercial crewmember license issued
and of each Commercial Fisheries Entry Commission (CFEC) permit
renewed. Having only been made aware of Mr. Herbert's letter
this morning, he said he could not speak to the veracity of the
data attached thereto, although the balance of the fund is
almost $12,000,000, against claims in the range of $700,000-
$800,000 per year. Mr. Monagle offered his belief that the sale
of the licenses under discussion has not been a significant
impact to fund revenues.
CO-CHAIR SEATON recalled that at the time the legislature
approved the sale of this license, the legislation was changed
to allow one person to purchase the license more than once in a
year. He asked Mr. Monagle to research whether the 7-day
license is a way to avoid paying the full nonresident commercial
fee, which is intended to pay for administration of the fund,
and to cover liability to the state. He further asked Mr.
Monagle to provide data on how many licenses were purchased by
the same person.
MR. MONAGLE said that the Alaska Department of Fish & Game
(ADFG) does not capture specific information on each license
sold, but he agreed to research the performance of the
Fisherman's Fund prior to the passage of this legislation in
2005, and afterward.
1:15:23 PM
CO-CHAIR FEIGE asked whether it is possible to differentiate
what class of license was held by a crewmember who filed a
workers' compensation claim.
MR. MONAGLE answered that his division could identify whether a
crewmember was a resident or a nonresident. He was unsure about
information on the type of license.
CO-CHAIR SEATON requested that the division, on behalf of the
Fisherman's Fund, request analysis by ADFG on whether the
licenses being sold are purchased serially - to avoid paying the
full, nonresident fee - or if they are purchased individually.
MR. MONAGLE agreed.
1:16:43 PM
HB 328-OIL AND GAS CORPORATE TAXES
1:16:48 PM
CO-CHAIR FEIGE announced that the final 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."
[Before the committee was Version I, which was adopted as the
working document on 3/28/12.]
1:17:31 PM
JOHANNA BALES, Deputy Director, Anchorage Office, Tax Division,
Department of Revenue (DOR), expressed her understanding that
the committee wished to hear discussion regarding the 4/3/12
letter to Representative Seaton from Bruce Tangeman, Deputy
Commissioner, DOR.
CO-CHAIR SEATON stated the proposed committee substitute (CS)
for HB 328, Version I, was offered by the committee to address
the questions raised earlier by DOR and industry. He said his
goal was to hear DOR's response to Version I, and how the bill
can efficiently implement policy. He asked Ms. Bales to review
the letter in an orderly fashion.
MS. BALES advised that as requested, the letter is a review of
the CS by DOR, and also identifies previously-discussed issues.
She cautioned that the issues identified in the letter are not
all-encompassing. Beginning with paragraph (A), she noted DOR's
first concern that there is a requirement for companies to make
estimated tax payments, but there is no penalty for
noncompliance. The department suggested that the language of
the proposed CS include the penalty provisions of Internal
Revenue Code Sec. 6655. She pointed out that the penalty
provisions under the Production Tax that are included in the CS
do not belong, cause confusion, and conflict with the Internal
Revenue Code provisions. The remedy recommended by DOR is that
the Production Tax penalty provisions are taken out and the
penalty provisions of the Internal Revenue Code are adopted.
CO-CHAIR SEATON surmised adequate language under the penalty
provision would read:
Penalties would be those as under the Internal Revenue
Code Sec. 6655, using Alaska interest rates.
MS. BALES opined DOR is "fairly certain" those provisions would
work. Right now under the corporate income tax structure, DOR
adopts the Internal Revenue Code and all of the provisions
apply.
1:21:49 PM
CO-CHAIR FEIGE, in response to Co-Chair Seaton's request,
encouraged the drafter of the bill to interject, if necessary.
MS. BALES directed attention to paragraph B of the letter,
concerning the language in Sections 3 and 5 of the bill. She
advised that a corporation operating in Alaska would not be
subject to separate accounting provisions until it was actually
producing oil. Therefore, DOR is concerned that if there were
an exploration corporation operating in the state, it would not
be subject to separate accounting, but would have to compute its
taxable income using a water's edge formulary apportionment,
because it is not an oil and gas company under that provision.
In that case, when the exploration corporation began producing
oil and gas, it would be subject to separate accounting, and any
losses carried forward from its exploration phase would have to
be dealt with in the separate accounting provision. Ms. Bales
remarked:
The way that this language is written doesn't get us
there, because the problem you have is that the
language that allows any type of losses to be carried
into [AS 43.21] are in 43.21, and yet you're not
subject to that until you're actually producing. ...
There needs to be some very straightforward language,
probably not even within 43.21, that basically says
that if you're an oil and gas exploration company and
... you incur losses, and then you are subject
eventually to 43.21, that those losses incurred during
those exploration and development phases get to be
carried forward into 43.21.
CO-CHAIR SEATON asked whether having the aforementioned
provision in AS 43.20 or in AS 43.21 would take care of DOR's
concern.
MS. BALES explained language needs to be in either AS 43.20 or
AS 43.21 that addresses when a corporation is subject to tax
under another provision, if that provision relates to oil and
gas. She turned attention to paragraph C of the letter, saying
this is similar to the concern in paragraph B that there is a
provision that allows for lease acquisition payments, property
taxes, and interest incurred prior to production; those items
would not be allowed to be deducted against future production
income, because the methodology that gives those deductions is
in AS 43.20. This also causes confusion and is a "disconnect."
Ms. Bales continued to explain that in addition to the loss
items discussed in paragraph B, capital expenditure items need a
provision to carry them into AS 43.21 when a corporation starts
producing.
CO-CHAIR SEATON clarified that if in AS 43.20 there were a
provision that expenses could be carried forward into AS 43.21
and used against taxes - if they had not been previously offset
by credits - that would take care of the situation.
MS. BALES said DOR requires language that talks about ensuring
that capitalized items, and any remaining basis in those
properties and capitalized items, are carried forward into AS
43.21.
CO-CHAIR SEATON repeated for the benefit of staff from
Legislative Legal and Research Services, Legislative Affairs
Agency.
1:27:50 PM
CO-CHAIR FEIGE passed the gavel to Co-Chair Seaton.
MS. BALES turned to paragraph D of the letter, and observed that
there is no language in AS 43.21 that requires property to be
capitalized and depreciated; there was an attempt to do that in
AS 43.21.210 (c)(5) but that language allows a company to write-
off the direct cost of purchasing a piece of equipment, and also
allows the company to take depreciation on the same equipment.
Although the intent here was to require that property be
capitalized and not taken as a direct expense, that is not what
this language says. Again, specific language is needed that
says property must be capitalized and depreciated.
CO-CHAIR SEATON asked Ms. Bales to restate the language needed
in Section 5.
MS. BALES advised there are many provisions in the Internal
Revenue Code that deal with these issues and it is extremely
complex. In further response to Co-Chair Seaton, she
acknowledged it was possible to adopt a provision in the code,
but cautioned that the code has lots of different ways to handle
property, and adopting the provisions in the Internal Revenue
Code makes sense. She clarified that the capitalization
provisions that talk about capitalization, and how to determine
basis for depreciation, are in Section 1231. The provisions
within the Internal Revenue Code are various and different code
sections may be relevant. It is difficult for DOR to pinpoint
that a specific code section is relevant, because the department
needs to know the full intent of the legislation.
CO-CHAIR SEATON explained that the intent is to get property
capitalized, using the current capitalization depreciation
schedules. He asked whether there exists in Alaska Statutes
such a regulation.
1:33:23 PM
MS. BALES said under the current corporate income tax, DOR
adopts the entire Internal Revenue Code - including all of the
regulations, revenue rulings, and court cases - which gives DOR
a broad basis of guidance. She summarized that the biggest
issue is that because AS 43.20 is "stand alone" and does not
adopt the Internal Revenue Code, many situations are not
addressed. Furthermore, the proposed bill requires a
corporation's oil and gas production activity to be taxed under
AS 43.21, but other activity to be taxed under AS 43.20, and DOR
anticipates problems bringing those two activities together.
CO-CHAIR SEATON suggested the language could say, "Property will
be capitalized under 43.21 in the same manner that it's
capitalized in 43.20."
MS. BALES opined that language would help for the capitalization
of property, but there would still be questions on provisions in
AS 43.21 related to previous deductions, the depreciation of
assets, and timing.
CO-CHAIR SEATON recommended adopting the depreciation schedule
currently used by the Internal Revenue Service (IRS).
MS. BALES observed that currently oil and gas companies do not
calculate their depreciation the same way as for their federal
taxes, because they are required to use the Internal Revenue
Code as of 1981. Again, in the bill there remains separate
accounting for oil and gas, but worldwide apportionment for
other activities. In fact, DOR is highly concerned because it
cannot look to the Internal Revenue Code for guidance pertaining
to intercompany transactions, and capital gains and losses,
since those transactions are now being accounted for
significantly differently. Moreover, the capital gains and
losses provisions in the Internal Revenue Code are even more
numerous than the consolidated corporation rules. Ms. Bales
then directed attention to paragraph E of the letter, noting
again that the provision in AS 43.21.210(c)(7) has no related
language in AS 43.20. Paragraph F addresses AS 43.21.210(c)(8),
which allows expenses that were incurred on dry holes, abandoned
wells, and unsuccessful exploration, to be written off; however,
those expenses would have already been deducted under AS 43.20
as part of an operating loss. Needed is language that allows
the calculation of operating loss under different methodology.
1:39:40 PM
CO-CHAIR SEATON inferred there could be a restriction so that
the state would not pay a tax credit on an expense, and then
allow the expense to be deducted. In response to Ms. Bales, he
said he was referring to a production tax credit.
MS. BALES surmised Co-Chair Seaton intended that a company that
received a credit in its production tax means that the value of
that expense in corporate tax should be reduced.
CO-CHAIR SEATON said yes, the tax should be reduced, or the tax
credit should be declared as income.
MS. BALES advised that is a definite departure from the Internal
Revenue Code, so there would need to be specific language to
that affect. Ms. Bales continued to paragraph G, and questioned
whether the intent was to disallow the film production tax
credit.
CO-CHAIR SEATON indicated the committee would further discuss
the film production tax credit.
MS. BALES, as an aside, pointed out that the Internal Revenue
Code credits are adopted under AS 43.20, thus federal credits
are allowed for expenses incurred in Alaska or elsewhere, but
would not be under AS 43.21.
1:44:07 PM
CO-CHAIR SEATON confirmed that those federal credits are allowed
to be used anywhere in the U.S.
MS. BALES said yes. She returned attention to paragraph H,
saying that this provision is probably DOR's biggest concern; as
a matter of fact, DOR is unsure as to whether adopting the
Internal Revenue Code in its entirety provides the solution. As
the bill directs, intercompany transactions would only be
allowed when they are to the benefit of an oil and gas producing
activity in Alaska. Under the Internal Revenue Code, many
intercompany transactions are not recognized - they negate
themselves - thus adopting the Internal Revenue Code does not
necessarily put the issue to rest. She said DOR would need
specific language that identifies what type of transactions a
corporation in Alaska has with a sister company that provides a
benefit to the oil and gas production activity in Alaska. In
response to Co-Chair Seaton, she gave the example of an oil and
gas parent company that has a subsidiary which is a production
company producing oil and gas in Alaska. If the parent company
creates a sister company which supports the production activity
of the subsidiary, the parent company is required to calculate
its tax under water's edge formulary apportionment.
Furthermore, based on the language of the bill, the sister
company would no longer be an oil and gas company, and not part
of the consolidated group conducting predominately oil and gas
activity. In this case, DOR is unsure how to deal with the
sister company's activities and expenses.
REPRESENTATIVE GARDNER asked whether companies divide up their
activities for tax purposes; if so, are services by a subsidiary
- which may have other partners - that are paid by the parent
company, direct costs.
MS. BALES agreed that subsidiaries are often created for tax or
geographical purposes. Common problems dealing with billings
that are all going to be paid for by the parent corporation are
transfer pricing, overpricing, and switching income from one
jurisdiction to another. She recommended that DOR and the bill
sponsor have further discussions related to sister corporations.
1:50:20 PM
CO-CHAIR SEATON suggested language as follows:
Intercompany expenditures must be calculated on a
commercially reasonable rate
MS. BALES acknowledged the aforementioned language would be
helpful; however, during an audit one of the biggest issues the
IRS deals with is when a domestic corporation transfers income
offshore to a foreign corporation with the same parent
corporation. An additional concern about this legislation is
that companies will learn to legally "income shift" within the
confines of this proposed statute. Returning attention to the
letter, Ms. Bales explained that paragraph I is a list of issues
incongruent with the Internal Revenue Code such as certain fines
and penalties that are not deductible against corporate income
tax, but are deductible under AS 43.21. Also, subchapter S
corporations are not taxed as corporations under Alaska
corporate income tax, but are - in certain cases - taxable under
AS 43.21.
CO-CHAIR SEATON asked whether there are subchapter S
corporations in Alaska that are engaged in oil and gas
production.
MS. BALES said she would provide that information. Continuing
with the list of issues from paragraph I, she informed the
committee intangible drilling costs are required to be
capitalized and depreciated under current Alaska corporate
income tax, but are not under AS 43.21, and dividend income may
or may not be taxable. In response to Co-Chair Seaton, she
explained dividend income may be interest income from
investments or from operations by a parent corporation. At this
time, HB 328 dividend income is separated from oil and gas
production activity. The fifth issue in paragraph I was that
the bill does not require an amended return if there is a
federal audit or federal amended return. The sixth issue in
paragraph I was that charitable contributions made by a
corporation solely engaged in oil and gas production activity do
not appear to be deductible. In response to Co-Chair Seaton,
she explained that this issue would arise because a corporation
whose only activity is oil and gas production is currently
allowed to deduct its contributions.
1:58:44 PM
MS. BALES continued to the seventh issue in paragraph I, noting
that under federal law, gains and losses are separated into many
types, but it is unclear to DOR as to how gains and losses
should be treated under the proposed bill. The eighth issue in
paragraph I was that as the bill is written, everything comes
under AS 43.21, and the Internal Revenue Code needs to be
adopted to maintain consistency. In conclusion, Ms. Bales
reiterated there are likely other issues and items that DOR did
not consider and, although most issues could be taken care of by
adopting the Internal Revenue Code, DOR must look at the effect
of different segments of the legislation on corporations, and at
the intent of the legislature.
CO-CHAIR SEATON thanked Ms. Bales for her helpful presentation.
He spoke of the legislature's responsibility to create policy
with few questions, and the value of cooperation from agencies.
He also noted that a policy call on separate accounting is
especially relevant in light of the announcement by
ConocoPhillips that it has split into two corporations:
Phillips 66 will have all of the downstream operations, most of
which are outside of Alaska, and ConocoPhillips will retain
upstream operations.
There followed discussion about ConocoPhillips, and Co-Chair
Seaton recommended a recent article in Petroleum News on the
organization of integrated companies.
REPRESENTATIVE P. WILSON observed there was another letter
included in the committee packet from DOR dated 3/16/12.
CO-CHAIR SEATON explained that CS Version I was created in
response to the issues brought forth in DOR's letter of 3/16/12.
The letter discussed today, dated 4/3/12, would be the basis for
further refinement of the bill.
2:08:54 PM
[HB 328 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:09 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 7DaySeaton.doc |
HRES 4/6/2012 1:00:00 PM |
|
| DOL 7-Day Lic Stats 05 - Current.pdf |
HRES 4/6/2012 1:00:00 PM |
|
| Changes between HB 328 version B an CS Workdraft Version I.docx |
HRES 4/6/2012 1:00:00 PM |
HB 328 |
| Workdraft CS HB 328 Version I.pdf |
HRES 4/6/2012 1:00:00 PM |
HB 328 |
| Tangeman to Seaton 3-16-2012.pdf |
HRES 4/6/2012 1:00:00 PM |
|
| Tangeman to Seaton 4-3-2012 (2).pdf |
HRES 4/6/2012 1:00:00 PM |