Legislature(2015 - 2016)BARNES 124
04/17/2015 01:00 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| SB70 | |
| SJR18 | |
| HB191 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | SB 70 | TELECONFERENCED | |
| + | SJR 18 | TELECONFERENCED | |
| *+ | HB 191 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 191-OIL AND GAS CORPORATE TAXES
2:10:19 PM
CO-CHAIR NAGEAK announced that the final order of business is
HOUSE BILL NO. 191, "An Act relating to the oil and gas
corporate income tax; and providing for an effective date."
CO-CHAIR NAGEAK noted the committee will not take any action on
HB 191 and the bill will be held over for future discussion.
2:10:43 PM
REPRESENTATIVE SEATON, sponsor, introduced HB 191 using a
PowerPoint presentation. He said HB 191 would ensure fair and
equitable treatment among [corporate] taxpayers, whether they
are multi-national companies or Alaska companies producing oil
or gas only in Alaska. He addressed slide 2, explaining that
worldwide apportionment attributes a percentage of a
corporation's total worldwide expenses to each jurisdiction and
treats the [parent] company and all of its subsidiaries as a
single entity for tax purposes. The problem is that when a
corporation's subsidiaries outside of Alaska are less profitable
than they are inside of Alaska, it reduces the taxes the company
pays to Alaska to account for the expenses incurred overseas or
in the Lower 48. He noted he is using the word profit a little
vernacular; everyone understands what that means - people are
often talking about net margin, which means profit before taxes.
Continuing, he explained that under separate accounting each
jurisdiction is looked at separately. The difference between
the revenue generated in a jurisdiction and the expenses
attributed to generation of that revenue in a jurisdiction is
the net margin/profit. The method of separate accounting means
that everybody is going to pay the same. A corporation that
exists solely in Alaska, producing oil and gas in Alaska, with
all expenses related to Alaska, will pay 9.4 percent tax on its
profit. Historically under worldwide apportionment, the multi-
national corporations pay much less than 9.4 percent tax because
they can write off their overseas expenses against the profits
they made in Alaska.
2:14:07 PM
REPRESENTATIVE SEATON turned to slide 3, "History of Separate
Accounting," reporting that Alaska originally began with
worldwide apportionment and found it was not collecting what it
felt was its fair share from revenues generated in Alaska. The
state subsequently changed its system to separate accounting,
using this system from 1978-1981, but the state was sued by oil
companies. The fear was the amount of money the state would
have to pay to the oil companies if the state lost the lawsuit
because the companies would be paying less under worldwide
apportionment, so the legislature went back to worldwide
apportionment. The state ended up winning on all counts in the
Alaska Supreme Court. This was appealed to the U.S. Supreme
Court, but the U.S. Supreme Court dismissed the case because it
didn't bring up any issues of federal importance. He moved to
slide 4 to show the cover page of the lawsuit case [in the
Alaska Supreme Court]. Displaying slide 5 he pointed out that
during the years 1978-1981, inclusive, the total difference
between separate accounting and worldwide apportionment was $1.8
billion. Fearing Alaska might have to repay this amount, the
legislature repealed separate accounting. Representative Seaton
explained that slide 6 is from a presentation made by Dan
Dickinson of the Department of Revenue in 1999. Between 1982
and 1997 the state collected $4.6 billion less by using
worldwide apportionment than it would have collected using
separate accounting. He clarified that the only thing being
talked about is deduction of expenses from overseas, the tax
rate would not be changed and would remain at 9.4 percent. He
noted slide 7 is a graphic representation of Mr. Dickinson's
report. The blue bars are what the state actually collected and
the grey bars are what would have been collected at the same tax
rate under separate accounting, with the difference between the
quite large.
2:17:36 PM
REPRESENTATIVE SEATON related that an argument heard is that
separate accounting is difficult to do. He displayed a synopsis
(slide 8) of the two states (Oklahoma and Mississippi) and the
80 countries that use separate accounting, drawing attention to
the companies that operate in Alaska as well as those two states
and the other countries. [Companies operating in both Alaska
and Mississippi include Anadarko Petroleum, Apache Corporation,
Aurora Exploration, Chevron USA, ExxonMobil, Hilcorp Energy
Company, Shell Oil, Tesoro, and Ultra Oil & Gas; Companies
operating in both Alaska and Oklahoma include Anadarko
Petroleum, Apache Corporation, BP Exploration & Production,
Chevron USA, ConocoPhillips, ExxonMobil Corporation, and XTO
Energy]. He pointed out that it is more difficult for the
companies to do separate accounting in Oklahoma and Mississippi
because there are close adjoining states where the companies are
also doing oil and gas development, while Alaska is thousands of
miles away from another state. Regarding the 80 oil-producing
countries, he reported that for nonresident corporations in
these countries the vast majority of the companies must use
separate accounting. [Companies operating in both Alaska and
other countries include Anadarko Petroleum, Apache Corporation,
BP Exploration & Production, Chevron USA, ConocoPhillips, Eni
Petroleum, ExxonMobil Corporation, Repsol, Shell Oil Company
(Royal Dutch Shell), and Statoil]. Thus, these companies
already are doing separate accounting. Ten states in the U.S.
allow a company to choose whether to use worldwide apportionment
or separate accounting, he added, and almost always the
companies choose worldwide apportionment. However, that doesn't
mean the companies aren't calculating it all the time because
they will swap back and forth when it is beneficial.
2:19:33 PM
REPRESENTATIVE SEATON reviewed the tax rates and net income for
the top five oil companies paying taxes to Alaska for tax years
2006-2013 (slides 9-12). He explained ConocoPhillips is
separated out [slides 11-12] because it is the only corporation
required to separate its Alaska production, thus it is the only
company that reports it to the Securities and Exchange
Commission (SEC). Because tax data in Alaska is confidential,
data for the top five companies in Alaska is combined into an
aggregate rather than individually for each of those companies.
Turning to slide 10, "Top Five Oil Companies - Corporate Income
Tax Comparison," he pointed out that in 2013 the tax paid under
worldwide apportionment was $355 million less than what it would
have been under separate accounting. Further, between 2006 and
2013 the effective tax rate paid to Alaska by these five multi-
national companies declined [from 10.1 percent] in 2006, when
there was a change in tax rate halfway through the year, to 4.4
percent in 2013. However, an Alaska-only company pays 9.4
percent corporate income tax.
2:21:40 PM
REPRESENTATIVE SEATON brought attention to slide 11, "Table 2:
ConocoPhillips Exploration and Production Net Income per Barrel
of Oil Equivalent by Selected Jurisdictions." He noted that the
average net income per barrel [for the years 2000-2014] is
$18.73 for Alaska, $7.66 for the Lower 48, and $10.95 for the
global total. Those differences in net income per barrel of oil
equivalents is explained by the taxes being paid to Alaska being
less than half of what would be required of an Alaska-only
producer. There is a problem with mixing oil and gas because
gas is generally less profitable. However, the companies have
never separated their oil production from their gas production;
they have been asked to do so, but they have declined.
Displaying slide 12, a graphic representation of the numbers on
slide 11 for ConocoPhillips, he noted the huge difference in net
income per barrel that is seen on the graph.
2:23:32 PM
REPRESENTATIVE SEATON moved to slide 13 to continue addressing
ConocoPhillips and Alaska. He explained he isn't picking on
ConocoPhillips, but since ConocoPhillips is the only corporation
required to make reports to the SEC [the information is
available]. Bringing attention to slide 14 depicting a 2011
article from Petroleum News, he noted that Greg Garland, the
ConocoPhillips senior vice president for exploration and
production in the Americas, states that ConocoPhillips likes the
Eagle Ford [shale play in Texas] because [the $45 per barrel
margin] was twice that of Conoco's global portfolio, meaning the
global portfolio was about $23 per barrel. Looking at Alaska's
oil economics in 2011 (slide 15), Representative Seaton pointed
out that the net margin [of $43.50] per barrel of oil was
essentially the same as the Eagle Ford net margin [of $45] that
ConocoPhillips said it liked. Alaska's 2011 margins were twice
ConocoPhillips' global average, which shows how Alaska's taxes
get diluted. Moving to slide 16, he noted that ConocoPhillips
is very bullish on Alaska: making a final investment decision
on expanding the 1H drill site at West Sak and going to viscous
oil production, sanctioning construction of site 2S at Kuparuk
River, and so forth. The question is how that relates to Alaska
versus other oil economics (slide 17). He pointed out that the
[total] rig count for Alaska increased between 2008 and 2015 as
did the rig count just for ConocoPhillips in Alaska, whereas the
rig count in the Lower 48 and in Canada went down between [2012
and 2015]. Oil companies are not investing in new exploration
and production in the Lower 48 because they are investing for
profit, he said. They are investing in Alaska because it is
more profitable - without separate accounting that lower
profitability in the Lower 48 reduces their Alaska taxes.
2:26:33 PM
REPRESENTATIVE JOSEPHSON said he is interested in this but is
inclined to play a bit of devil's advocate. Noting that
Representative Seaton is talking about how Alaska's investment
climate is better due to worldwide apportionment, he asked
whether this isn't the Senate Bill 21 argument all over again.
He further asked what the difference is from the oil industry's
perspective.
REPRESENTATIVE SEATON replied there is quite a bit of difference
because it is corporate income tax that is being talked about,
which is based on profitability of the oil company, not oil
production tax as in Senate Bill 21. He clarified he isn't
saying the companies are more profitable here because of
worldwide apportionment, rather the state is reducing its taxes
because Alaska is more profitable than the other places. From
the historical data it can be seen that there was only one time
when worldwide apportionment would have gotten Alaska a little
more money than separate accounting. Exploration and
production, which Alaska is heavy in, is generally more
profitable than retail oil sales and refining.
2:28:49 PM
REPRESENTATIVE JOSEPHSON reiterated that HB 191 is intriguing to
him and noted that he voted against Senate Bill 21, but said it
seems that all of last summer's ads on television and in print
could have been cut and "corporate income tax" pasted in and
statements made about how it would suppress interest in
development and the positive economics of development, even
though it is a different topic.
REPRESENTATIVE SEATON responded he doesn't believe so - the
profits are there and then the taxes are applied. He said he
doesn't think it is the tax differential that is driving
investment in Alaska, the tax differential actually subsidizes
investment in lower-profit areas. For example, a company could
go into an area where its profit isn't quite as good because the
expenses are higher, but those would be somewhat offset because
it would reduce the company's taxes in Alaska. It is to
Alaska's detriment, not its benefit, that that happens.
2:30:16 PM
REPRESENTATIVE SEATON displayed slide 18, "Estimated average oil
industry 'margin' per taxable barrel in Alaska for FY16." He
pointed out that [under the current production tax method] the
company margin before state and federal income tax is $11.04.
He opined that companies "are still investing here; the point of
this is that rigs are being laid down all over in the Lower 48
and other places, whereas current investment is going here
because it's more profitable, if you're more profitable than the
other regions then you are going to reduce your taxes here for
the expenses that are occurring elsewhere."
REPRESENTATIVE SEATON drew attention to slide 19, pointing out
that for tax year 2013 the top five oil companies paid taxes of
4.4 percent, whereas under separate accounting they would have
paid the statutory rate of 9.4 percent. Thus, under worldwide
apportionment rather than separate accounting, Alaska's loss in
2013 was $355 million. The average loss over the last few years
is $220 million and $220 million a year is significant given the
fiscal times that Alaska is in.
2:31:44 PM
REPRESENTATIVE JOSEPHSON inquired whether a policy call was made
by either the Hammond Administration or the Sheffield
Administration in the early and mid-1980s to come off the
corporate income throttle and come down harder on gross income
tax or severance tax.
REPRESENTATIVE SEATON answered he doesn't believe so. When he
came to the legislature there was the Economic Limit Factor
(ELF), which was totally broken. Under the Murkowski
Administration the second largest oil field wasn't paying
anything. There was not a balance made of increasing taxes,
there was only a lowering of those and not going back to
separate accounting even though there was an Alaska Supreme
Court decision telling the legislature that that was an adequate
and appropriate way to tax. History has shown that the state
would be better off under a [separate accounting] tax regime
with a 9.4 percent tax rate, but the legislature for one reason
or another has not changed its tax policy and that is why HB 191
is before the committee. The bill would ensure that the taxes
are fairly and equitably apportioned to international oil
companies as well as Alaska-only oil companies; under separate
accounting a tax rate of 9.4 percent would be applied to both
types of companies. So, the question before the legislature is
whether to charge double taxation on Alaska-only companies,
given the tax rate for Alaska-only companies is 9.4 percent and
the tax rate for international companies has been 4.4 percent.
2:34:33 PM
REPRESENTATIVE TARR asked whether, in relation to activities on
the Alaska Liquefied Natural Gas Project (Alaska LNG Project or
AK LNG), under separate accounting oil development activities
would be accounted for separate from the corporate activities
related to AK LNG or would all of that be considered Alaska.
REPRESENTATIVE SEATON replied that oil and gas properties
generally are consolidated as being Alaska operations in the oil
and gas. He deferred to the Department of Revenue for an answer
as to whether the transportation is going to be separated.
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
responded to Representative Tarr's question by explaining that
Alaska's corporate income tax taxes activities within Alaska.
It doesn't tax them directly because the relative profitability
for those Alaska activities, which includes the profit on the
production, the profit on the transportation, and so forth, gets
run through this formula of apportionment where it gets compared
with the relative numbers in other parts of the world. He said
he doesn't envision any difference inside AK LNG. The state's,
the corporations', and the partners' in AK LNG's profits would
be subject to this tax just as they currently are. In the
conversations before the body last year, say, during debate of
Senate Bill 138, the property tax and the corporate income tax
were sort of outside the in-kind conversation. The expectation
was that the State of Alaska would be taking its royalties and
its production taxes in-kind and the state would own that gas
and run it through that project. Whatever the companies'
profits were on their portions of AK LNG would then be subject
to corporate income tax. He said he doesn't see where HB 191
would change that mechanism in any way.
2:38:39 PM
REPRESENTATIVE JOSEPHSON requested Mr. Alper to provide a few
sentences on the foundational philosophy between royalty, a
gross severance tax, be it profit or through some other method,
and corporate income tax.
MR. ALPER answered that the royalty is the landowner's share.
In most parts of North America oil and gas are produced from
privately owned land so the royalty would go to the owner of
that land. Alaska is fortunate in that most of the oil and gas
that has been developed on the North Slope is on land that is
owned and selected by the state, so the state gets to take that
piece as the landowner, regardless of the state's role as the
sovereign. The severance tax is the state's right as the
sovereign. Because it is a nonrenewable resource that's being
severed from the ground, the state is being compensated in some
form for the one-time removal of something that fundamentally
belongs to the state, a subsurface resource. A corporate income
tax is separate from the natural resource world. It is the
state's taxation power, also a sovereign power as the state, for
the privilege of doing business within Alaska's borders in
exchange for the services the state provides. The state
collects a tax on the profit of corporate entities. It is a
broad tax, it goes beyond the corporations that produce oil and
gas; it applies to other large companies that meet the threshold
of the corporate income tax.
2:40:45 PM
REPRESENTATIVE JOSEPHSON commented that the corporate income tax
is literally the fact that the state is enforcing laws and
contracts, has a court system, all those privileges that the
state affords a corporation.
MR. ALPER concurred. The fact that there is an apportionment
mechanism is in many ways a simplifying factor, he said, a way
in which the various states and their tax administrations
cooperate with each other to balance the deck. Where HB 191
goes is to recognize that there are some inherent imbalances
specifically in the oil and gas world, perhaps because the
nature of the production in Alaska is very different from what
happens in the Lower 48.
2:41:30 PM
REPRESENTATIVE SEATON pointed out that nothing in the bill would
affect credits. All of the credits that would be applicable to
the current income tax that is being paid are transferred and
are applicable to the tax here. There is no slight-of-hand
trying to eliminate or impact credits. Credits are mentioned in
the bill only so that all of the credits are available and none
of them are available twice: in the year that a credit would be
there, it could not be claimed on both the old and new income
tax.
2:42:41 PM
REPRESENTATIVE TARR inquired whether the accounting system
proposed in HB 191 could lead to increased investment, given
that a company is balancing credits and investments against each
other.
MR. ALPER replied that the suite of credits currently available
against the corporate income tax are somewhat different in
nature than the credits on, say, the oil and gas production tax.
The credits tend to be targeted to very specific activities,
such as manufacturing, value-added, refinery, education. The
corporate income tax, because it has a broad taxpayer base, has
been used as a place where credits can be used for desired
activity. For example, many of the companies earning a film
credit don't pay income tax in the state of Alaska because they
are not Alaskan companies, but those credits would then be sold
and used by corporate income tax payers. He said HB 191 would
maintain all of that structure. All of those taxes,
transferable and otherwise, could be used against either the
traditional corporate income tax, which would continue to be
apportioned, or this new oil and gas corporate income tax, which
would use a separate accounting mechanism.
[HB 191 was held over.]