Legislature(2009 - 2010)SENATE FINANCE 532
02/19/2010 09:00 AM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Week in Review-production Tax Elements | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 19, 2010
9:02 a.m.
9:02:38 AM
CALL TO ORDER
Co-Chair Stedman called the Senate Finance Committee
meeting to order at 9:02 a.m.
MEMBERS PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Johnny Ellis
Senator Dennis Egan
Senator Joe Thomas
MEMBERS ABSENT
Senator Charlie Huggins, Vice-Chair
Senator Donny Olson
ALSO PRESENT
Pat Galvin, Commissioner, Department of Revenue; Susan
Pollard, Attorney, Department of Law; Senator John Coghill;
Senator Joe Paskvan.
PRESENT VIA TELECONFERENCE
None
SUMMARY
WEEK IN REVIEW-PRODUCTION TAX ELEMENTS
TAX CREDIT-FOLLOW-UP TO COMMITTEE QUESTIONS
REVENUE FORECASTING & SHARING
TAX PAYMENT PENALTIES
^Week in Review-Production Tax Elements
9:02:45 AM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, presented
the PowerPoint "Summary of the Production Tax Review"
expanded format of information requested earlier." (Copy on
File) He explained that the information was in response to
earlier requests. The information regarding the revenue
forecasting includes a separate discussion involving
comparison with the Economic Limit Factor (ELF) system.
9:06:12 AM
Commissioner Galvin began with Slide 2: "Production Tax
Calculation--FY2009." The presentation consolidated the
information provided in the week prior. He discussed Slide
4 and "Oil Price and Production Outlook," which addresses
the various components of the calculation sheet. He
informed that costs are crucial to calculation when using
the production forecast method. Previous committee
discussions captured the "income statement" approach.
Commissioner Galvin turned to Slide 5-6 and "Transportation
Costs." He pointed out the deduction for marine
transportation, the tariff on the Trans-Alaska pipeline,
and information on the history of the tariff including
issues regarding the calculation methodology. The currently
producing fields constituted the majority of capital
expenditures. The underdevelopment expenditures have
experienced the greatest expansion in the capital
expenditure projection.
9:09:12 AM
Commissioner Galvin discussed Slide 7 and "Lease
Expenditures." The process used to draft regulations
defines qualified lease expenditures by providing a clear
and predictable method of discerning which costs can be
deductable. Projections relating to spending levels across
the North Slope in an aggregated fashion are shown on Slide
7. The slide exhibits growing capital expenditure levels
collectively. The currently producing fields comprised a
majority of the capital expenditures. Once the lease
expenditures were deducted from the point of production
value, the production tax value (PTV) was computed. The PTV
is the per barrel value that derives the progressivity
rate. Progressivity rate is the tax rate applied to
production for an individual tax payer. The base tax is 25
percent along with the progressive tax, which increased at
a rate of .4 percent per dollar. He explained the example
provided on the slide. If the expenditures had been greater
per barrel by one dollar, reducing the production tax value
by one dollar, the progressive tax rate would have been
reduced by .4 percent. He pointed out the dynamic of an
altered progressive tax value and progressivity charge with
an increase in the price of oil.
9:13:58 AM
Commissioner Galvin continued with "Tax Credits" on Slides
10 and 11. The general capital expenditure credits equal 20
percent of all capital expenditures. Exploration credits
fall into different categories. Operating losses where the
company has more expenditures than production values
results in a credit.
Commissioner Galvin discussed Slide 12 "The Updated Credits
Applied Against Tax Liability." He noted that the graph is
presented in calendar years as opposed to fiscal years. For
2006, 2007 and 2008 the department has annual tax returns
to derive the credits from. For 2009, 2010, and 2011, the
department is basing the number on the expected level of
capital expenditure.
Co-Chair Hoffman asked about the capital expenditure
credits under the governor's proposed legislation.
Commissioner Galvin responded that the bill will contain
the requested information including a breakdown of capital
costs.
Co-Chair Stedman asked about effects of the large capital
expenditure credit. He asked if the presentation will break
down Prudhoe Kuparuk data and compare it to that of Point
Thompson. Commissioner Galvin responded yes, that a full
break down of the different fields will be presented later
in the morning.
Co-Chair Stedman noted that the presentations are fast
paced and he appreciated the department providing up to
date information.
Commissioner Galvin explained Slide 13: "How Credits are
Used" The use of credits depends upon the tax payers own
situation.
Two Examples
Commissioner Galvin addressed Slide 14 and the "Credit
Example 1: New Entrant"
A new entrant with no current production pursues an
exploration project requiring $200 million in
investment
(depending on location), worth $40 -$80 million
its "tax loss" or "net operating loss (NOL)", worth up
to $50 million
9:20:05 AM
Commissioner Galvin discussed Slide 15 and the "Credit
Example 1: New Entrant (cont.)"
The total credits of $90 -$130 million, can be:
the Transferee pays $90 -$130 million less in tax
exploration; company pays $70 -$110 million.
recoups this money.
The state bears the risk for failure as does the new
entrant
Commissioner Galvin addressed Slide 16 and the "Exploration
Dry Hole- New Entrant." He explained that the state share
was 65 percent and the state could expense the 12 percent
of the federal income tax.
9:23:24 AM
Commissioner Galvin continued with Slide 17, "Credit
Example 2: Incumbent Producer"
development requiring $200 million investment
worth $40 million
company reduces their taxes due by the total capital
expense multiplied by the tax rate:
$200 million * 25%, worth $50 million; plus
$200 million * progressivity surcharge rate (which is
reduced due to the drop in PTV)
9:25:55 AM
Co-Chair Stedman pointed out the statement that
progressivity applies to all barrels produced, once
triggered. Commissioner Galvin agreed with Co-Chair
Stedman.
Commissioner Galvin addressed Slide 18: and the "Credit
Example 2: Incumbent Producer (cont.)"
$200 million, greater than $90 million
development's capital cost; true investment cost for
the incumbent is less than $110 million
this money
The state bears the risk for failure as does the
incumbent investor
Commissioner Galvin referenced an exploration project on
Slide 19: "Unsuccessful Development Project-Existing
Producer" He explained that the state share is greater than
under the experience of the new entrant because of the
progressivity impact. Assuming that the state had a $70
well head value, the result was a 9 percent progressivity
rate, which results in 76 percent as the state's share of
the investment cost.
Co-Chair Stedman asked about an estimate in the event that
the exploration incentive credit was unavailable.
Commissioner Galvin responded that the exploration
incentive credit would be dropped from 40 percent to 20
percent reducing the state share to 56 percent. The federal
share would then increase to 15 percent resulting in a
company share of approximately 28 percent.
9:30:18 AM
Co-Chair Hoffman referred to Slide 12 and commented that
the increase in values from 2006 to 2011 is a result of the
state's financial responsibility for the vast majority of
exploration. Commissioner Galvin agreed that the state
revenue is increasing and the tax burden on the industry is
increasing and the state has distributed the impact so that
those investing in the new exploration and development in
Alaska receive a tax benefit. The department is endeavoring
to bring in additional revenue while incentivizing
production and employment opportunities.
Co-Chair Hoffman asked about the top line of capital
expenditures rising in 2009 to 2011 with an additional $130
million in state expenses. He opined that the incentive was
working as there is a dramatic $200 million increase from
2006.
Co-Chair Stedman requested clarification regarding Prudhoe
and Kuparuk and the exploration and development expenditure
definitions. Commissioner Galvin replied that Prudhoe and
Kuparuk were considered development expenditures.
9:33:35 AM
Senator Thomas referred to Slide 12 and the reference to
calendar years. He asked if the information presented on
Slide 12 was historical or estimated. Commissioner Galvin
explained that the shaded areas are estimated and refer to
monthly reports, which are not as detailed as the annual
report. He noted that a different format was employed with
the projections of spending levels to anticipate credit use
and application. He recalled a past presentation discussing
the difference between credit earning and application. He
clarified that Slide 12 represents the taxes applied by
producers.
9:36:33 AM
Commissioner Galvin discussed "Overall Sharing of Oil
Revenue and Profit" on Slide 20. He commented on Slide 21
"Allocation of Revenue and Profit on $76 Barrel of Alaska
North Slope Oil" which represents the allocation of revenue
generated from a barrel of oil at a $76 price. He explained
the graph and its various components. He determined
production and transit costs to be $24. State royalty was
approximately 12.5 percent calculated with the point of
production value. The production tax, state income tax,
state property tax, the federal income tax and the after
tax value for the company are also exhibited on Slide 21.
The graph is broken down by dollars and after cost profit.
Co-Chair Stedman asked about the production tax and whether
it includes a progressivity calculation. Commissioner
Galvin replied yes, the production tax includes both the
base tax rate and the progressivity.
Co-Chair Hoffman questioned the use of 34.4 percent on
Slide 2.
9:41:20 AM AT EASE
9:46:01 AM RECONVENED
Commissioner Galvin responded that a deduction of the tax
and the royalty allows for the production tax value. The
production tax equals the progressivity component as
mentioned earlier. He pointed out that Slide 21 shows an
after credit portion exhibited in the green band of the
graphic image. The percent of the profit is therefore less
than the tax rate multiplied by remaining $43. The
combination of 25 percent plus the progressivity
subtracting the credits results in 23.8 percent of the
profit.
Co-Chair Stedman pointed out that the net of the credit is
not taken into account with high level calculations of the
tax structure. Commissioner Galvin agreed and noted that
the provided example uses $76 per barrel as a
generalization across the North Slope. The example
represents the state's share of the profit as 47 percent.
The royalty drives the state share higher at the lower end.
The upper end with the progressivity element of the
production tax drives the state share higher.
Commissioner Galvin moved on to Slide 22: and the "Shares
of North Slope Oil Profit at Different Prices." He
explained that the slide does not account for the costs
paid to arrive at the profit. The share of the revenue
generated from the oil did not reveal the fact that the
producers will recover costs first. The percent allocated
to the producer to cover costs provided a different picture
of the distribution of the revenue.
Commissioner Galvin addressed the Slide 23: "Split of Total
Oil Revenue."
the Producer recovers all costs before taxes are
assessed.
the Producer retains the majority of the revenue.
9:51:28 AM
Senator Thomas requested a chart similar to Slide 23
illustrating the investment made by the parties in
relationship to the dispersion of revenue. Commissioner
Galvin responded that he had such a slide and would present
it to the committee. He mentioned earlier charts exhibiting
the marginal tax rate or the marginal government take,
which represent the share of the dollar of investment born
by the state and federal government versus the producer.
When the price approaches $92.50, the state and federal
government share is approaching 90 percent of the
investment dollar. Senator Thomas appreciated the
information.
Commissioner Galvin addressed Slides 24 and 25, "Estimated
FY 2010 Tax-Prudhoe Bay and Kuparuk" and the various
categories. The North Slope fields are separated into three
categories. The initial category is Prudhoe Bay and
Kuparuk. The second category includes all producing fields
other than Prudhoe and Kuparuk. The third category includes
non producing fields. The numbers seen here were deduced as
rounded estimates for 2010, and were not intended to be
specific dollar amounts. These aggregate the production tax
by field. Each player has a different category of interest.
This exercise provides the committee with a sense of a
proportionate share between the different components of the
field.
9:56:10 AM
Commissioner Galvin continued that current production price
estimates for Prudhoe Bay and Kuparuk was 488 thousand
barrels per day, which equaled $32 million per day,
equivalent of $11 billion annually in value. Subtracting
royalty barrels results in taxable barrels with a value of
approximately $10.5 billion. Rounded transportation costs
reduce the estimate by approximately $1 billion. Lease
expenditures are valued at approximately $10 per barrel,
operating expenditures are valued at $6 per barrel, and
capital expenditures result in a production tax value of $7
billion resulting in a progressivity rate of 6.2 percent.
The total derived taxes before credits were $2.2 billion.
The credits include 20 percent of the amount expended. The
after-tax revenue generated from Prudhoe and Kuparuk
resulted in an estimated $2 billion.
Commissioner Galvin moved on to "Estimated FY 2010 Tax for
Producing North Slope units excluding Prudhoe and Kuparuk,"
Slides 27 and 28. He explained that the methodology was
similar to that discussed in Slides 25 and 26, but with
less production resulting in taxable barrels on an annual
basis of $3.5 billion. The transportation deduction equals
approximately $300 million. Lease expenditures are similar
to Prudhoe at $9, but capital expenditures are greater. The
productions tax value for these fields was lower due to the
additional capital expenditure resulting in a lower
progressivity rate and after-credit tax of approximately
$528 million.
10:00:11 AM
Commissioner Galvin addressed Slide 29: "Estimated FY 2010
Tax for Developing Units." These units provide zero
production and therefore zero costs on a per barrel basis.
He explained that expenditures would result in a negative
production tax value similar to a new entrant. Some fields
will take the loss and apply it against the revenue
generated by other fields resulting in a 25% reduction in
the state's tax bill or a credit of $243 million.
Commissioner Galvin detailed Slide 31: "Summary of Tax
Calculation for Different Fields." He commented that the
majority of production and tax revenue was generated from
the two largest fields. The operating expenditures were
similar on a per barrel basis.
10:03:12 AM
Co-Chair Stedman assumed that Prudhoe and Kuparuk had lower
operating costs. Commissioner Galvin responded that the
operating expenditure level for a field reaches the lowest
level during the peak of production. Prudhoe and Kuparuk
are no longer in peak production. He summarized that the
other North Slope producing units were nearing peak
production allowing for the similarity in operating
expenditures.
10:04:44 AM
Co-Chair Stedman commented on the amount of investment
required to stem decline in production thereby doubling the
capital expenditures. He asked if the capital expenditures
targeted those included in the original Petroleum
Production Tax (PPT). Commissioner Galvin indicated that
additional investment was necessary. The data reflects that
the level of investment was not evenly spread throughout
the fields.
Commissioner Galvin continued that Slide 31 provides an
interesting comparison regarding the different fields. The
committee views the line item in the budget representing a
reduction of $400 million, which nearly equates to the
amount of tax generated by the non-producing units.
10:07:30 AM
Commissioner Galvin summarized with the information on
Slide 32: "At the Close of the Week"
Covered Information on Production Tax Components,
their Function, and Relationship
Tax is Calculated
Comparables
production basin
Co-Chair Stedman commented on the helpful nature of
presentation.
10:11:08 AM AT-EASE
10:13:33 AM RECONVENED
TAX PAYMENT PENALTIES
SUSAN POLLARD, ATTORNEY, DEPARTMENT OF LAW, referred to an
overview entitled, "Tax Payment Penalties" (copy on file).
She began with Slide 2: "Presentation Overview"
2
She turned to Slide 3: "Overview-Tax Penalties and
Interest"
Alaska Statutes 43.05
3
in specific tax chapters
compromise of tax or penalty, assessment, interest on
underpayments and refunds
interest and penalties, discussed below
penalties, are first heard through informal conference
at DOR
confidential until final administrative decision AS
43.05.470 (may be subject to protective order)
10:16:27 AM
Ms. Pollard explained Slide 4: "Penalties"
AS 43.05.220: civil penalties
4
25%
-Penalties won't be imposed if taxpayer shows that
failure to file or pay is due to reasonable cause and
not willful neglect.
-Regulations apply administrative and judicial
interpretations of IRC 6651 15
AAC 05.200 (reasonable cause for delay)
deficiency
-Includes substantial deviation from statutes in
reporting income or claiming deductions, exaggerated
deductions, failure to keep adequate records, or
failure to justify understatement of income. 15 AAC
05.220
-Requires clear and convincing evidence that tax
liability was understated as attempt to evade tax. 15
AAC 05.230
10:19:42 AM
Ms. Pollard discussed Slide 5: "Penalties-Criminal"
AS 43.05.290: criminal penalties
5
or truthfully account for and pay tax: class C felony
class A misdemeanor
making, a false return (perjury): felonies, up to $25k
and 3 years imprisonment
return: class A misdemeanor
misdemeanor, up to $2000 fine, 6 months imprisonment
Ms. Pollard discussed Slide 6: "Compromise and Settlement"
AS 43.05.070 - If in opinion of DOR there is doubt
over liability or collectability of tax or penalty,
DOR, with approval of Attorney General, may compromise
tax or penalty
misrepresentation of material fact
Senator Egan asked, since the penalties involve
corporations, who would go to jail. Ms. Pollard did not
know. Commissioner Galvin relied on knowledge of other
situations where corporations were liable. Jail time would
only be relevant in an instance where an individual breaks
the law, but a corporation can be subject to other criminal
penalties such as probation and fines.
10:22:30 AM
Ms. Pollard continued with Slide 7: "Production tax
penalties: failure to provide information"
payment due
producer name, gross amount of oil or gas production,
gross value at point of production, purchaser and
price information, qualified capital expenditures,
lease expenditures and payments or credits from
facility sharing
delinquent reports
amount
Ms. Pollard included the regulation in Slide 8: "15 AAC
55.840 (b)-Penalties AS 43.55.030"
(b) If, 30 days after a report required to be filed
under AS43.55.030 is due, the department has not
notified the person required to file the report … the
department will not assess …a penalty …. that begins
earlier than a date specified in a written notice to
the person, except in case of the person's fraud or
willful concealment. … [T]he department will specify a
date that is at least 10 days after the date of the
department's delivery of the notice …. Nothing in this
subsection affects the person's obligation to file a
complete and accurate report.
Commissioner Galvin stressed that the importance of the
reports cannot be underestimated. The function of the
production tax is noted through the reports. The additional
penalty addresses those who choose not to provide the
reports.
Ms. Pollard summarized that the reports provide a useful
tool for all concerned.
10:30:25 AM
Ms. Pollard detailed Slide 9: "Production tax penalties:
failure to provide information"
AS 43.55.040:
9
purchaser or royalty owner to provide information
necessary to compute the tax
assess a penalty, under standards determined by DOR of
not more than $1,000 a day for each day the person
fails to file after notice by the department. 15 AAC
55.840
43.05.290
Ms. Pollard discussed Slide 10: "15 AAC 55.840(c)-Penalties
43.55.040"
or other document required to be filed under AS
43.55.040, the department will provide written notice
of the failure to the person and will specify in the
notice a date beginning on which the person will be
liable for a penalty under AS 43.55.040(7) if the
person does not remedy the failure before that date….
If, 30 days after the date specified, the department
has not assessed a penalty or otherwise notified the
person in writing that the person has failed to remedy
the failure before the date specified, the department
will not assess a penalty under AS 43.55.040
(7) for the failure, except in case of the person's
fraud or willful concealment.
right to require the additional or more complete and
accurate filing of a report, statement, or other
document.
Ms. Pollard spoke about Slide 11: "Penalties 43.55.030 and
.040"
To determine amount of penalty, DOR will consider:
ability of DOR to proceed in absence of information
and others
10:33:49 AM
Ms. Pollard reviewed Slide 12: "Summary"
reporting provisions of production tax
.290
for taxpayers
Co-Chair Stedman recalled a case necessitating payment of
tens of millions of dollars in interest. He recalled
concern that the system lacked flexibility. He commented on
the inflexible rate of interest. He observed that he was
unsure where to direct his question.
10:36:08 AM
Commissioner Galvin apologized that interest rates were not
included in the packet. He agreed that a discussion about
interest rates was important and he suggested a separate
presentation. Co-Chair Stedman concurred.
Senator Thomas recalled a comment that for every dollar
spent in a lawsuit, the state recovered ten dollars. He
asked about the statistic. Ms. Pollard offered to provide
an answer following consultation with her supervisor.
10:39:28 AM
ADJOURNMENT
The meeting was adjourned at 10:41 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2010 02 19 DOR Tax Payment Penalties SFC.pdf |
SFIN 2/19/2010 9:00:00 AM |
Oil and Gas Production Tax Review |
| Agenda 021910.docx |
SFIN 2/19/2010 9:00:00 AM |
|
| 2010 02 19 DOR Summary of Production Tax Review SFC.pdf |
SFIN 2/19/2010 9:00:00 AM |
Oil and Gas Production Tax Review |