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Senate Finance Aide Summarizes Repeal Big Oil Tax Subsidies Act

MAR. 19, 2012

Senate Finance Aide Summarizes Repeal Big Oil Tax Subsidies Act

DATED MAR. 19, 2012
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From: [NAME REDACTED]

 

Sent: Monday, March 19, 2012 7:14 PM

 

To: [NAME REDACTED]

 

 

Subject: Senate Floor: Oil and Gas Subsidy Repeal Bill and Renewable Energy Tax Extensions

Senate Tax Las,

As reported below by the floor staff, the Senate began the Rule 14 process of S.2204, the Repeal Big Oil Tax Subsidies Act (Menendez) today. It is our understanding that the bill will be very similar to S. 940, the Close Big Oil Tax Loopholes Act, which the Senate considered on May 17, 2011 (roll call vote #72). The bill would repeal five tax subsidies for the five largest integrated oil and gas companies (explained below) and use the revenue to extend expired and expiring renewable energy tax incentives. It is our understanding the renewable energy incentives would be the same as those in Stabenow Amendment #1812 to the highway bill considered on March 13, 2012. The revenue raised from repeal of these oil and gas provisions would fully offset the extension of the renewable tax provisions.

[NAME REDACTED]

Dual Capacity Rules. Taxpayers that are subject to a foreign levy and that also receive a specific economic benefit from the levying country -- known as dual capacity taxpayers -- may not claim a foreign tax credit for the portion of the levy paid for the economic benefit (such as oil and gas drilling rights). This proposal would limit the amount of creditable foreign taxes available to a major integrated oil company to the amount of foreign income taxes that would have been payable if the taxpayer were not a dual capacity taxpayer (i.e., a company receiving a specific economic benefit from the foreign country, such as oil and gas drilling rights).

Repeal Domestic Manufacturing Deduction. The domestic manufacturing deduction effectively provides a lower rate of tax with respect to certain business operations conducted in the United States. This proposal would retain the overall manufacturing deduction, but exclude from the definition of domestic production all gross receipts derived from the sale, exchange or other disposition of oil, natural gas or a primary product thereof for the five largest major integrated oil companies.

Repeal Expensing of Intangible Drilling Costs. Current law allows oil companies to immediately expense intangible drilling costs (allowing an immediate deduction of 70% for integrated oil companies, and 100% for others), rather than recovering the cost over the life of the investment as for most investments in other industries. These intangible drilling costs include all expenditures made by an operator for wages, fuel, repairs, hauling, supplies, and other expenses necessary for the drilling of wells and the preparation of wells for the production of oil and gas. Under the proposal intangible drilling costs would be capitalized as depreciable or depletable property, depending on the nature of the cost incurred, in accordance with the generally applicable rules for the five largest integrated oil companies.

Repeal Percentage Depletion. Oil and gas producers can depreciate an oil and gas well based on a fixed percentage of the gross income (i.e., revenue) from the sale of oil or gas. Under this method, the total deductions sometimes exceed the capital invested to acquire and develop the reserves (i.e., exceeds the basis in the property). The proposal would require the five largest integrated oil and gas companies to utilize cost depletion whereby the deduction cannot exceed the capital investment or total cost in the property.

Repeal Tertiary Injectants Deduction: Tertiary injectants are used in enhanced oil recovery (EOR) to drive more oil from an existing well. Types of injectants include carbon dioxide, hydrogen, water, steam, or any other method approved by IRS. Enacted in 1980, Code § 193 permits taxpayers to deduct the full costs of such injectants on a current basis. The proposal would require the cost of these injectants to be capitalized and deducted over time for the largest integrated oil and gas companies.

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