Legislature(2011 - 2012)BARNES 124
04/09/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB295 | |
| SB91 | |
| HB328 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 295 | TELECONFERENCED | |
| + | SB 91 | TELECONFERENCED | |
| += | HB 328 | TELECONFERENCED | |
| += | SB 192 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 328-OIL AND GAS CORPORATE TAXES
1:59:12 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 the
proposed committee substitute (CS), Version I, labeled 27-
LS1142\I, Nauman, 3/27/12, adopted as the working document on
3/28/12.]
1:59:16 PM
REPRESENTATIVE MUNOZ moved to adopt the proposed committee
substitute (CS) for HB 328(RES), Version 27-LS1142\E, Nauman,
4/7/12, as the working document. There being no objection,
Version E was before the committee.
1:59:31 PM
CO-CHAIR FEIGE opened public testimony.
2:00:16 PM
THOMAS K. WILLIAMS, Senior Tax and Royalty Counsel, BP
Exploration (Alaska) Inc., stated that he had worked for the
State of Alaska as the Director of Petroleum Revenue from 1975 -
1979, during the years of separate accounting, and he suggested
the reinstatement of several guidelines.
2:02:00 PM
CO-CHAIR FEIGE asked if Mr. Williams had created the initial
separate accounting system.
MR. WILLIAMS replied that the legislature had passed the
separate accounting, and the commissioner of DOR at the time,
had assigned this accounting to the Petroleum Reserve division,
instead of the income tax division which handled personal income
tax. He pointed out that consideration had been given for the
difference between a severance or production tax and an income
tax. He explained that the legislature could set any tax rate
for production within the state. He noted that income tax was
based on income earned within the state. He declared that the
fundamental approach within the context of income tax, how much
did you make in Alaska, was confronted directly by separate
accounting. He allowed that the accounting became more
difficult when a business included both in-state and out of
state income. He gave an example of a fisherman who lived in
Canada, bought fuel and goods in Canada and Alaska, fished in
Alaska, Canada and international waters, and sold his fish in
the State of Washington. He questioned a clear means for
determining the amount of income from each area, as it was not
clear, and was removed from "the pure idea of taxing the
business straight as if it's standing alone in Alaska." With
separate accounting, assumptions were then made for cost and
income allocations, even though it was not straightforward. He
offered another example for the problem of allocating the costs
and income from gold mining and refining in different states,
stating that it was difficult to determine the answers.
2:09:42 PM
MR. WILLIAMS explained that the apportionment approach had been
in response to the desire for uniform systems of laws so that
each state did not have a different set of laws. One of these
was called the Uniform Division of Income for Tax Purposes Act
(UDITPA), the formula for which was later used in the Multi-
State Tax Compact (MTC). He explained that this approach
attempted to determine the potential to generate income in a
state, compared this to the potential everywhere the company did
business, and then allocated the actual overall profits back to
each of the states in proportion to the state's income
generating potential. He opined that Alaska, in 1959, was the
first state to adopt this approach. He shared that the current
statute divided income on the basis of three different measures
of income generating potential: amount of property investment
in Alaska should get the same return compared to other areas;
sales should bring in the same margin everywhere; and production
should have comparable income potential. He declared that each
of those in-state percentages was averaged and then multiplied
by the overall business to arrive at the present tax.
2:12:58 PM
MR. WILLIAMS pointed out that this present tax system was not
free of issues as it was only as good as the assumption that the
in-state factors were representative of income generating
potential out of state. He declared that, for every industry in
the extractive business, it became more expensive as the easier
product was removed, until, ultimately, the cost of removal and
the value were equal, and then the company would start to lose
money.
2:14:15 PM
MR. WILLIAMS emphasized that for every company producing oil and
gas or coal, the time would come when it would want separate
accounting, as the profitability would be less in Alaska than
elsewhere. He declared separate accounting to be a good tool
for use at the end of field life. He suggested that the small
fields did not have the same margins to start with and those
margins were not at all comparable to the North Slope fields.
He pointed out that the state could not be sure whether it would
get more or less money from a particular tax system because it
depended on where the profit margin was in each individual
business. He summarized that this explained the differing
responses to the amount of money made by a business in Alaska.
2:16:04 PM
MR. WILLIAMS spoke about some of the constitutional issues
addressed in 1978. He said that ACES focused on value over
price, defining price as what it sold for and value as what it
could have sold for. He declared that, oftentimes, the price
would fall short of the value, and that it was unconstitutional
to tax income that had not been recognized. He said that ACES
allowed a tariff to be calculated on fair, just, and reasonable.
He went on to explain that, to the extent that the state was
disregarding what was actually paid, it would either be allowing
over-deduction, which was not a constitutional issue, or under-
deduction for actual cost which was an issue as it taxed income
that did not exist. He declared that the state could tax less
income than existed, but could not tax more income than existed.
[Co-Chair Feige returned the gavel to Co-Chair Seaton.]
2:18:55 PM
MR. WILLIAMS reported that Alaska followed the Multi-State Tax
Compact Formula for ascertaining the size of the family of
companies to determine the taxable income. He allowed that
Alaska chose a two-pronged test: if there was more than 50
percent ownership, or common control of the group, then it was a
consolidated business. This was included in the regulations
during the time of separate accounting in Alaska. He pointed
out that this was included in proposed HB 328. He relayed a
story about unitary business and apportionment, which was also
separate accounting, and a determination by the Alaska Supreme
Court which rejected the UDIPTA test for 50 percent ownership or
control in favor of the unitary business and apportionment
concept. He suggested that the legislature consult with their
attorneys for advice, as these issues were contained in proposed
HB 328.
2:22:22 PM
MR. WILLIAMS questioned the reasoning for separate accounting to
be implemented to increase revenue. He offered his belief that
the taxation in proposed HB 328 would be counterproductive in
the long term as an investment for Alaska. He reported that
"the market is betting that we have a temporary situation" of
higher oil prices. He allowed that some companies, as oil
prices decreased, could request separate accounting. He pointed
out that the Department of Revenue (DOR) already had the
discretion to offer separate accounting under the MTC.
2:24:53 PM
REPRESENTATIVE GARDNER referenced the increasing cost per barrel
that was being experienced from some of the older oil fields,
and that there was a "tipping point" where it would be more
advantageous for the industry to have separate accounting
because Alaska was so expensive. She asked if the current
opposition to separate accounting meant that the profitability
in Alaska ranked "well compared to the profitability in other
places."
MR. WILLIAMS, in response, said that although the assumption
could be made he was unsure if it was a correct assumption. He
questioned that the purpose for the assumption was to gain more
revenue, and, if so, the long term effect could be to deter
investments which would increase the rate of production from its
current decline.
REPRESENTATIVE GARDNER asked why, if the oil industry currently
opposed separate accounting, was it a fair assumption that
apportionment benefited the oil industry. She expressed her
agreement that each oil company should pursue its own best
interests.
2:26:47 PM
MR. WILLIAMS referred to earlier testimony by Alaska Oil and Gas
Association (AOGAA) which reflected unanimous opposition by its
members against separate accounting, which could offer more
opportunities for business in Alaska.
2:27:35 PM
CO-CHAIR SEATON pointed out that, although the Alaska corporate
income tax rate was 9.4 percent, under apportionment the tax
rate was only 5.2 percent. He asked what the benefit to Alaska
was to be perceived as "less conducive to a competitive fiscal
system," when, in fact, the actual corporate tax rate was lower
than recognized.
MR. WILLIAMS offered his belief that the strongest attribute for
investing in Alaska was its track record of stability, as there
had been very few re-writes of oil and gas taxes since 1981. He
pointed out that there could be adjustments to forecasting and
optimized investment if the platform was stable. He opined that
the level of taxation had "overshot the mark."
CO-CHAIR SEATON pointed to the competitive calculations
presented during the PowerPoint presentations, which stated that
the corporate income tax in Alaska was 9.4 percent. He asked
how Alaska could be competitive when the actual corporate income
tax based on apportionment was lower than the tax presented.
MR. WILLIAMS stated that he disagreed, declaring that Alaska
always received 9.4 percent of any income attributed to Alaska,
under both separate accounting and apportionment.
2:31:02 PM
CO-CHAIR SEATON asked how a formula for a worldwide
apportionment, which arrived at a significantly different result
than what was presented, would portray Alaska in its true
competitive nature.
MR. WILLIAMS replied that people would perceive Alaska as
accurately as they could, which combined the opportunities,
operating costs and logistics, and fiscal regime. This would
allow for estimation as to the profitability of an investment,
and he opined that any competitive investment would be made,
regardless of the perception to Alaska. He offered his belief
that the current system, since ACES, did not entice investment.
He pointed out that oil companies had testified to the Senate
Finance Committee with suggestions for meaningful fiscal changes
to spur additional investment.
CO-CHAIR SEATON referred to Mr. Williams' earlier reference that
the basis of worldwide apportionment was that the margin of
profit should be the same worldwide. He then directed attention
to the Legislative Legal and Research Services report dated
March 2012, which detailed that the prior 10 years of per barrel
income data from ConocoPhillips Alaska, Inc. reflected that
Alaska had a higher margin than other states. He asked why
Alaska would not correct this fiscal system.
MR. WILLIAMS declared that he was not in the position to respond
to the underlying principle to apportionment as it applied to
ConocoPhillips Alaska, Inc. However, he said that this fiscal
principle was developed by UDITPA in order to standardize taxes
and codes. He said that he had also chaired the Multi-State Tax
Commission, which offered this as an article of good faith. He
referenced that the Alaska Supreme Court had also accepted this
as an article of good faith, expressing its reasoning in earlier
cases that "the object of this formula approach, slice the pie,
is not to get to perfection in terms of measuring, but rather to
have it represent fairly the potential to generate income over
time." He declared that there was sound underlying economic
evidence and analysis for UDITPA with which the courts had
expressed agreement.
CO-CHAIR SEATON expressed his appreciation for the declaration
that this was an article of good faith, but then he stated that
his data reflected that the good faith was not justified. He
offered to provide Mr. Williams' with the aforementioned
Legislative Legal and Research Services report.
2:38:09 PM
REPRESENTATIVE MUNOZ directed attention to the earlier reference
that the department had the ability to implement separate
accounting, and asked what level would determine when separate
accounting was an option. She asked how close Alaska was to
this level.
MR. WILLIAMS relayed that separate accounting depended on the
specific facts and circumstances for a particular company. He
stated that the test in the statute was whether the formula
fairly represented the extent of the business activity and
income. He said that "fairly representative" was a subjective
term designed to deal with many types of conditions and not to
be prescriptive. He offered his belief that the challenge would
need to be material and impugn, which would lead to a full scale
investigation to determine whether it was a temporary or ongoing
circumstance.
2:40:52 PM
MICHAEL HURLEY, Lobbyist, ConocoPhillips Alaska, Inc., addressed
the issues and concerns that had come up since he testified
earlier on the proposed bill. He distributed the 2010 Index to
Financial Statement from ConocoPhillips Alaska, Inc. that listed
the jurisdiction breakdown of income, expenses, and revenues.
He pointed out that the aforementioned legislative analysis was
incomplete, as numbers were missing that were important for
understanding relative margins between different segments of the
company business.
CO-CHAIR SEATON expressed his desire to get a better
understanding of the intricacies.
2:43:17 PM
MR. HURLEY directed attention to the upcoming repositioning of
ConocoPhillips into two separate publicly traded companies,
which was anticipated to occur on May 1, 2012. He reported that
these two companies would be taxed differently, noting that
although the company currently paid state income tax in 45
states, it was still unclear what would be the impact for each
state. He offered to answer the earlier question regarding the
perception of different corporate tax rates.
2:45:12 PM
MR. HURLEY explained that evaluating a business, for example a
ConocoPhillips business in Alaska, did not necessarily mean that
the 9.4 percent corporate income tax was all paid to the State
of Alaska. He pointed out that, as other states do
apportionment, if ConocoPhillips earned an incremental dollar of
income in Alaska, that dollar would be included in the
ConocoPhillips revenue for apportionment by all the other
states. He observed that $1 invested on the North Slope would
generate income which would be taxed in 45 different states, so
that the ConocoPhillips Alaska, Inc. state income tax
calculation must "have a blended rate that reflects all of those
different taxes that are going to be levied on that $1 of
incremental income."
2:47:30 PM
REPRESENTATIVE P. WILSON asked to clarify that the tax paid in
other states was subtracted from the Alaska corporate tax rate
of 9.4 percent.
MR. HURLEY replied that when evaluating Alaska investments or
its competitiveness, it was necessary to take into account the
taxes paid on incremental Alaska income, which, he opined, was
paid in 42 of the 45 jurisdictions in which ConocoPhillips did
business. He stated that it was complex, and he offered an
example of the sales tax generated by a gas pipeline.
2:50:06 PM
MR. HURLEY referred back to the ConocoPhillips Index to
Financial Statements and, recalling the aforementioned
Legislative Legal and Research Services report, directed
attention to the consolidated operations. He stated that the
research report only referred to the consolidated operations,
but did not include the equity affiliates. He explained that,
although ConocoPhillips did not have equity affiliates in Alaska
or the Lower 48, for legal reasons in many jurisdictions there
were separately owned equity companies and affiliates. He
declared that these companies, under Securities and Exchange
Commission (SEC) rules, had to be accounted for separately. He
stated that the research report ignored these companies although
their margins per barrel of oil equivalent (BOE) were higher in
Asia Pacific/Middle East and Europe, than in Alaska.
CO-CHAIR SEATON asked to clarify that either those should be
factored in, or ignored with the focus on Alaska and the Lower
48.
MR. HURLEY expressed his belief that the equity affiliates were
appropriate to include, as the issue was with the structure of
the ConocoPhillips business.
CO-CHAIR SEATON explained that, as there were not any affiliates
in Alaska or the Lower 48, it would be appropriate to compare
them with each other for net income BOE, but not with the
international companies as their net income BOE contained an
additional factor.
MR. HURLEY expressed his agreement.
2:53:28 PM
MR. HURLEY said that ConocoPhillips Alaska, Inc. supported the
earlier Department of Revenue (DOR) testimony to adopt as much
of the Internal Revenue Code as possible, as the further the
state strayed from the Internal Revenue code for defining
expenses, revenue, and intercompany transactions, the more
difficult it would be for DOR.
CO-CHAIR SEATON replied that the DOR suggestions had been
incorporated into Version E of the proposed bill, and asked Mr.
Hurley to address any further concerns as he studied this
version.
2:56:30 PM
MARIE EVANS, Lobbyist, ConocoPhillips Alaska, Inc., suggested
that page 13, lines 7-8 did not implement the intent that the
co-chair had just stated.
CO-CHAIR SEATON replied that there was no intent to avoid the
issues, and he requested an e-mail or public testimony.
2:57:27 PM
MR. HURLEY concluded by saying that ConocoPhillips Alaska, Inc.
did not believe that proposed HB 328 would make Alaska more
competitive and attract the capital which Alaska needed to stem
the decline of oil production. He opined that this policy
change would "make the state actually more hostage to oil prices
than they are today." He declared that the proposed bill would
exacerbate the situation and make things more difficult when oil
prices went down.
2:58:34 PM
CO-CHAIR SEATON, offering his belief that ConocoPhillips Alaska,
Inc. would remain in Alaska as an upstream company after the
"corporate split," asked if Phillips 66 would be a participant
in Alaska.
MR. HURLEY opined that there would not be any Phillips 66 assets
in Alaska, and that all the assets would be owned by
ConocoPhillips Alaska, Inc.
CO-CHAIR SEATON asked to clarify the reason that, as Phillips 66
and its downstream assets were no longer to pay corporate taxes
in Alaska, the price of oil in one mechanism was more than
another if the only activity in Alaska was upstream.
MR. HURLEY allowed that this would be true from the standpoint
of ConocoPhillips Alaska, Inc., noting, however, that his
company was only one of the major companies operating in Alaska.
He pointed out that some of the aforementioned small oil
companies did not pay any state corporate income tax at the
corporate level, as they were LLCs (Limited Liability Company).
CO-CHAIR SEATON offered his belief that this was also addressed
in Version E, and he stated that there was not an attempt to
provide a loophole for not paying corporate taxes to oil and gas
producing companies.
3:02:25 PM
CO-CHAIR SEATON announced that public testimony would be held
open.
[HB 328 was held over.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| Support Alyeska.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 295 |
| HB295 Background - MO 1121.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 295 |
| Work Draft 2012.04.04.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 295 |
| HB295 Bill Text.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 295 |
| HB295 Sponsor Statement.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 295 |
| HB295 Support Letters.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 295 |
| 91 CSSB Verson M.pdf |
HRES 4/9/2012 1:00:00 PM |
SB 91 |
| HB 328 Workdraft Version E.pdf |
HRES 4/9/2012 1:00:00 PM |
HB 328 |
| SB 91_Sponsor Statement.pdf |
HRES 4/9/2012 1:00:00 PM |
SB 91 |
| SB 91 2010 Participation Effort and Harvest in the Sport Fish Business-Guide Licensing and Logbook Programs.pdf |
HRES 4/9/2012 1:00:00 PM |
SB 91 |
| SB 91 SWLogsheet_2012.pdf |
HRES 4/9/2012 1:00:00 PM |
SB 91 |
| SB091CS(FIN)-03-30-12.pdf |
HRES 4/9/2012 1:00:00 PM |
SB 91 |
| SB 91 2012 Freshwater Charter Logbook.pdf |
HRES 4/9/2012 1:00:00 PM |
SB 91 |