Oil Company Decries Proposed Limits on LIFO Inventory Method, Foreign Tax Credits

Enclosed please find a letter from our Vice Chairman Peter Robertson urging that you strongly oppose several onerous anti-energy provisions that were included in the Senate passed version of the tax portion of the budget reconciliation bill. As Peter notes, these provisions are punitive, discriminatory and could have a detrimental effect on our ability to invest in expanded exploration, production and refining capacity precisely at a time when America and the world need more, not less, energy. We appreciate the support that the Administration has provided to date in opposing changes to LIFO and hope that you will actively oppose both the proposed changes in LIFO and proposed limitations of our ability to use foreign tax credits.

My warm regards to you and your family during this Holiday season.

I am writing to express Chevron's strong opposition to two discriminatory tax provisions included in the Senate version of the tax reconciliation bill and to urge the Administration to actively oppose both provisions as the House and Senate conferees work to resolve differences in their respective bills. The House version of the tax reconciliation bill does not contain either provision. These provisions would deter investment and undermine the international competitiveness of U.S. oil companies.

The first provisions would limit the use a few large integrated oil companies can make of the last-in/first-out (LIFO) method of inventory accounting, requiring them instead to revalue their inventories by an arbitrary amount so as to increase their tax liability at the very time our nation is seeking to expand our domestic refining capacity. The provision would require only large, integrated oil and gas companies to adjust the historical value of their 2005 ending inventory volumes by a purely arbitrary amount of $18.75 per barrel. There is no tax policy justification for this modification, and an adjustment of inventory values in this manner has no known support or rational connection with any accepted accounting practice. We appreciate the fact that the Administration has already come out in opposition to this provision in a Statement of Administration Policy issued on November 17, 2005.

To compound the punitive effect of the Senate bill, it also places additional limits on large, integrated oil and gas companies that pay foreign income taxes as well as receive a specific economic benefit from a foreign jurisdiction. In such countries, if there is no generally applicable income tax paid by other trades or businesses, any tax paid by these companies would not be considered creditable -- regardless of whether it is, in fact, an income tax. The provision also limits the amount of available credit in cases where the foreign country does impose a generally applicable tax to just that generally applicable rate. U.S. companies would receive no offsetting credit for foreign taxes paid on their income at a higher rate. This provision will put U.S. based companies like Chevron at a serious disadvantage in competing with foreign multinationals for foreign oil and gas exploration and production projects. It also places at risk the many U.S. based jobs that support U.S. petroleum companies operating in foreign countries. We urge the Administration to take the same strong position in opposition to the foreign tax credit provision that you have already taken on the LIFO provision.

I led an industry delegation that met last week with Acting Deputy Assistant Secretary for Tax Policy Eric Solomon and we had a very good and thorough discussion of both these issues. If you should need any information in addition to that which we provided Mr. Solomon I would be happy to provide it. Thank you again for Administration opposition to the LIFO provision and I strongly encourage you to oppose the foreign tax credit provision as well.