Legislature(2011 - 2012)BARNES 124

04/06/2012 01:00 PM RESOURCES


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01:04:20 PM Start
01:05:19 PM Discussion(s): 7-day Commercial Fishing Crewman's License
01:16:48 PM HB328
02:08:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 192 OIL AND GAS PRODUCTION TAX RATES TELECONFERENCED
<Pending Referral>
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
+= HB 328 OIL AND GAS CORPORATE TAXES TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
                    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