Exxon Mobil May Suffer, Overseas Rivals Benefit in U.S. Tax Plan

Exxon Mobil May Suffer, Overseas Rivals Benefit in U.S. Tax
Rex Tillerson, chief executive officer of ExxonMobil Corp., and executives from the other four companies are scheduled to appear before the Senate Finance Committee in Washington. Photo: Brendan Hoffman/Bloomberg

May 12 (Bloomberg) -- Royal Dutch Shell Plc and BP Plc could gain a competitive advantage in more than a dozen countries from a U.S. tax proposal targeted at major oil and gas companies.

Future investments by Shell, based in The Hague, and London-based BP wouldn’t be affected by one of the proposals being advanced by Democrats in the U.S. Senate. The bill would change the way that U.S.-based companies such as Exxon Mobil Corp., ConocoPhillips and Chevron Corp. would receive tax credits for payments to other governments.

“If these rules were changed and the foreign income for select U.S. oil and gas companies like Exxon Mobil were to be double taxed, our foreign-based competitors and the full range of foreign-government-owned oil companies would gain a significant competitive advantage,” Exxon Mobil Chief Executive Officer Rex Tillerson will tell the Senate Finance Committee today, according to prepared testimony.

The change in the so-called dual-capacity taxpayer rules, estimated to collect $6.5 billion over a decade, is the second-largest revenue generator in a tax proposal advocated by Senate Democrats. The bill is being written to apply only to the five major oil and gas companies -- Shell, BP, Exxon Mobil, ConocoPhillips and Chevron. The most significant provision in the bill would affect the U.S. operations of all five companies.

Senate Hearing

Tillerson and executives from the other four companies are scheduled to appear before the Senate Finance Committee in Washington. The full Senate may vote next week on legislation that would increase oil and gas taxes by $21 billion over 10 years and dedicate the money to reducing the U.S. budget deficit. Democrats say this would end unjustified subsidies for profitable companies, while Republicans and company officials say the legislation would impose higher taxes that could lead to higher gasoline prices for consumers.

The provision in the bill that would affect only the U.S.- based oil companies focuses on how the U.S. taxes income earned around the world. Typically, U.S.-based companies are required to pay taxes on all income they earn globally. Companies then receive U.S. tax credits for payments to other governments so they aren’t taxed twice on the same income.

The dual-capacity rules, as currently written, create a distinction between income taxes levied on profits and royalties that companies pay when they extract government-owned oil and gas. Royalties can be taken as tax deductions, not as more valuable tax credits. “Dual capacity” refers to the fact that companies pay taxes to other governments for multiple purposes.

Different Tax Rates

The Democrats’ proposal, a version of which was in President Barack Obama’s budget plan, would allow companies to claim tax credits only for the portion of income taxes that they would pay if they weren’t oil companies. Democrats say this would be an appropriate approach to tax systems that require different tax rates for oil and gas companies.

“U.S. oil and gas companies have smart lawyers and accountants, and they have figured out that if you can convince foreign governments such as Nigeria to charge your taxes -- to charge you taxes instead of royalties on your exploration, then they can get a big break on U.S. taxes,” Senator Robert Menendez, a New Jersey Democrat, said May 10 at a news conference in Washington. “This amounts to the U.S. government subsidizing foreign oil production.”

‘Double Taxation’

The proposal would lead to “double taxation” of foreign income, ConocoPhillips Chief Financial Officer Jeff Sheets told reporters in Houston yesterday.

The result of reduced U.S. competitiveness could mean fewer supplies globally, higher prices and fewer jobs in the U.S., he said. Sheets said ConocoPhillips has about 3,000 U.S. jobs supported by international operations.

Company spokeswoman Nancy Turner said in an e-mailed statement that she couldn’t estimate the anticipated effect of the proposal. She said the legislation could change the company’s geographic composition.

“The dual-capacity provision would simply render U.S. companies unable to compete for many projects against other non-U.S. competitors who don’t face the same type of tax burden imposed by their home countries,” she said.

The change could affect investment in more than a dozen countries that have special taxes or different rates for oil companies. A study by the American Petroleum Institute in 2010 found that changes to the dual-capacity rules could affect exploration projects in countries including Australia, Bahrain, Iraq, Malaysia, Norway, Qatar, the U.K. and Venezuela.

“It absolutely changes how they’ve done the economics, how they’ve approached that investment, sometimes a decade ago with the understanding that these taxes that they in fact pay would be creditable under our system,” said Stephen Comstock, manager of tax policy at API.

Higher Rates

Some countries charge much higher tax rates for oil and gas companies than they do for other companies. Bahrain, for example, imposes no corporate income tax and has a 46 percent tax on petroleum-related income, according to the API report. Qatar’s basic income tax rate is 10 percent; oil companies there pay 35 percent.

Exxon Mobil invested $16 billion in a liquefied natural gas project in Qatar when all companies paid a 35 percent tax rate. If Congress changes the tax law so that much of the 35 percent income tax on oil companies is considered a royalty, the company would face an effective tax rate of 53 percent, said Karl Schmalz, the company’s assistant general tax counsel.

Incentive to Sell

“There’s no way that we can make up that differential in treatment, so we’re not going to be able to bid effectively for new resources,” he said.

Schmalz said if the proposed tax law is enacted, Exxon Mobil would have an incentive to sell its project to a company that could take advantage of the more generous tax treatment and split the benefits with Exxon Mobil.

The $6.5 billion effect on the companies over the next decade would be relatively small compared with the size of the oil and gas industry. Exxon Mobil, based in Irving, Texas, earned $10.7 billion in net income in the first quarter of 2011.

Shell and BP could be affected to the extent that they have overseas operations within their U.S. subsidiaries, Comstock said. They would be able to structure future investments under their parent companies, which aren’t subject to U.S. taxation.

Smaller U.S.-based companies also could benefit, because the bill applies only to the major companies. Houston-based Marathon Oil Corp. and Murphy Oil Corp., based in El Dorado, Arkansas, have lobbied Congress on the dual-capacity issue.

Chevron, BP, Shell, Marathon and Murphy didn’t respond to requests for comment on the dual capacity issue yesterday.

Comstock said the IRS already has the authority to challenge taxpayers’ claims concerning the difference between royalties and taxes, and the IRS can rewrite its regulations if it finds abuses.

“This whole effort just seems to be misguided,” he said. “It seems to be pointed at an issue that’s just not there and can’t be there.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net