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Chevron Criticizes LIFO Restriction, FTC Limitation Proposals

NOV. 30, 2005

Chevron Criticizes LIFO Restriction, FTC Limitation Proposals

DATED NOV. 30, 2005
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LIFO Restriction on Integrated Oil Companies

 

 

The proposed limitation on LIFO accounting would impose a financial penalty on a handful of the largest U.S. refiners at the very time our nation is seeking to expand its domestic petroleum refining capacity. LIFO (last-in/first-out) is an accounting methodology that tracks and values a taxpayer's inventory for purposes of determining the cost of goods sold, which is deducted by the business from its gross income, and for determining the value of its inventory at year end. This inventory accounting method is based upon the assumption that the last goods brought into inventory are the first goods sold. The use of LIFO inventory accounting is not some form of tax "loophole." Rather, it is a well-accepted accounting method that has been permitted under the Internal Revenue Code since the 1930s to determine a taxpayer's income. Like taxpayers in other industries, many oil and gas companies properly elected to use LIFO to account for their inventory. At a time when the industry anticipated continued rising costs, LIFO was acknowledged to be the best method for tracking the true cost of petroleum products in their inventory and cost of goods sold. Requiring a select group of petroleum industry taxpayers to arbitrarily increase the value of their historical inventory is a thinly-veiled "windfall profits tax," which would reduce the capital available for refinery investment.

 

1. 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.

2. LIFO inventory accounting is widely acknowledged as a proper way for certain taxpayers to calculate their taxable income. Current tax statutes and regulations adequately address the application of LIFO. This proposal lacks justification: no tax abuse problem has been shown to exist necessitating the change in LIFO accounting and no other reason for the change has been articulated. This provision is simply a punitive measure against a select group of taxpayers, which would establish a bad precedent that could be imposed on other groups of taxpayers in the future as a means to raise federal revenue.

3. The companies impacted are leaders in the U.S. refining industry and provide vital and secure supplies of finished petroleum products needed to meet our nation's energy demands. This provision would manifest itself in a one-time, multi-billion dollar tax penalty for being in this business.

4. This impact would substantially restrict the capital available to these companies just at the very time they are attempting to recover from the tremendous damages caused by hurricanes Katrina and Rita. The U.S. Congressional Budget Office estimates the energy sector sustained capital losses from these two hurricanes of between $18 billion and $31 billion.

5. Such a restriction and penalty would act as a huge economic disincentive to these companies in an environment when the national policy and focus has been on trying to increase refining capacity. Even under current law, attracting capital for new refinery capacity has been difficult with refining rates of return averaging about 6.2 percent for the 10-year period ending in 2003 -- less than half the 13.5 percent for the S&P Industrials.

Foreign Tax Credit Limitation on Large Integrated Oil

 

Companies

 

 

A founding principle of the U.S. tax system provides that a U.S. taxpayer may take a tax credit for income taxes paid to foreign governments against their U.S. tax on income earned in that foreign country. If the U.S. were to tax that income without allowing an offset for the foreign income taxes paid, such income would be taxed twice and U.S. companies would be hindered in their ability to compete with foreign enterprises whose similar income would, in most cases, be taxed only once. Foreign tax credits can be claimed only to the extent such taxes are imposed upon income as defined in the Internal Revenue Code and existing regulations. These long standing regulations prevent taxpayers from claiming as creditable taxes other payments that may be made to foreign governments for which a corresponding benefit is received (e.g. royalties paid for access to natural resources). The Senate provision punitively increases the U.S. tax on the foreign source income of a select group of oil and gas companies. Further, it puts U.S. oil and gas companies at a disadvantage in acquiring new foreign energy resources against foreign competitors including government-owned national oil companies. The change also increases the likelihood that U.S. jobs will be outsourced to foreign competitors, and undermines U.S. national energy security.

The Senate provision places additional limits on large, integrated oil and gas companies that pay local 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. These companies would receive no offsetting credit for foreign taxes paid on their income at a higher rate.

Increasing the taxation of foreign source income by further limiting the foreign tax credit should be rejected for the following reasons:

  • Existing statutes and regulations already limit the ability of oil and gas companies to use foreign taxes on oil and gas income against other foreign income and prevent such companies from using non-income tax payments as creditable levies against their U.S. income. These regulations recognize the right of sovereign nations to develop fiscal systems of their own choosing, something ignored by the provision in the Senate bill.

  • If petroleum companies wish to stay in business, they must extract oil and gas where those resources can be economically recovered. As a result of the federal and state government limitations placed on exploration and production in most of the promising prospects in this country, U.S. petroleum companies must go overseas if they are to continue to provide adequate supplies of energy for American consumers.

  • Increasing the U.S. tax on the foreign source income of a select group of U.S. taxpayers would seriously harm their ability to compete with foreign multinationals for foreign oil and gas exploration and production projects. Moreover, U.S. petroleum companies operating overseas have thousands of U.S. based employees supporting those operations and tend to use American firms to supply their oil field equipment, technology, and other needs. These jobs will be at risk if the U.S. companies are outbid by foreign national oil companies.

  • U.S. tax policies that "tilt the playing field" against the U.S. petroleum industry's foreign exploration and production efforts run counter to our national security and current U.S. trade and foreign policy. The latter encourage the integration of worldwide trade and support foreign investment by U.S. oil companies in countries of political and strategic importance.

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