July 20, 2010
137 DTR G-5
By Christine Grimaldi and Alison Bennett
Citizens for Tax Justice, along with several other groups, July 19 urged the bipartisan leadership of the House Ways and Means Committee to close a tax code loophole allowing companies to change their address—both within the United States and offshore—to circumvent tax liability.
In a July 19 letter to Chairman Sander Levin (D-Mich.) and ranking member Dave Camp (R-Mich.), the groups said BP oil rig owner Transocean shifted addresses from Texas to Delaware to the Cayman Islands to Switzerland.
Transocean reportedly “has shaved 15 percentage points and billions of dollars off of its U.S. tax bill over the past decade by strategically locating ‘headquarters’ to no- and low- tax jurisdictions,” according to the letter. “In fact, Transocean is one of at least six oil drilling companies to pick up shop and move their addresses overseas to work the system,” the letter added.
Inverted Companies Criticized
“These companies, known as inverted corporations, grow their business in the United States and establish a nominal presence in a foreign country for tax purposes. Right now remaining loopholes within our law permits profitable companies to legally skip out on their taxes and shift their tax burden to taxpayers and responsible businesses already facing tough times in this economy,” the letter added.
The call for closing the loophole comes as Ways and Means is expected shortly to drop energy tax legislation. “Companies that use our roads, are protected by our military and access our markets should pay their share of U.S. taxes,” the letter said.
The letter came the same day that CTJ unveiled two additional reports criticizing the tax structure surrounding the oil and gas industry and highlighting problems with the U.S. international tax system in the wake of the BP disaster.
CTJ Calls for Tax Incentive Shutdown
In the first report, What Oil and Gas Companies Extract—From the American Public, CTJ asserted, “The truth is that oil and gas companies have for years received a bonanza of unjustified tax breaks that serve only to boost profits for their shareholders,” and urged shutdown of the tax incentives.
CTJ said in its view, “these subsidies do not spur the exploration of new reserves nor stimulate alternative energy investment,” noting that in the top five oil companies, “managers direct most of their excess cash to dividends and stock repurchases.”
According to the report, the percentage of net profits directed at these areas for the top five oil companies was 58 percent in 2005, 73 percent in 2006, 72 percent in 2007, 71 percent in 2008, and 89 percent in 2009.
Generous tax treatment also does not encourage the companies to develop alternative energy, CTJ said, noting that reviews of oil company press releases, Securities and Exchange Commission filings, and published articles suggest that alternative energy investments approximate less than 5 percent of profits for the top five firms.
Section 199 Deduction Targeted
The group said Congress should:
• bar large oil and gas companies from using the deduction for domestic manufacturing under tax code Section 199;
• repeal the deduction for intangible costs of exploring and developing oil and gas sources;
• repeal percentage depletion for oil and gas products;
• reduce the break for amortization of geological and geophysical expenditures; and
• modify rules for dual-capacity taxpayers.
In its second report, Offshore Drilling and Taxes: Gulf Oil Spill Highlights Problems With the U.S. International Tax System, CTJ noted the relocations of Transocean, the owner and operator of the BP Deepwater Horizon Drilling Rig, and said the company has saved an estimated $2 billion in taxes because of its corporate inversion.
International Tax System Attacked
Although in 2004 Congress passed legislation to stop tax breaks for such inversions on a going-forward basis, “it did nothing to stop the tax breaks from continuing to be available to companies that had already pretended to move,” CTJ said.
Another area of weakness in the U.S. international tax system is its transfer pricing rules, the group said. It noted that Transocean is “one of many companies that is in trouble with [the U.S. Internal Revenue Service] and tax authorities in other countries over the way it accounts for those transfers.” The company's financial statements indicate a potential liability of $1 billion in additional taxes related to its transfer pricing methods, CTJ said.
The group said that although some have called for a complete overhaul of the international tax regime, there is no reason to delay addressing what it called “egregious abuses.”
Text of the CTJ report on tax treatment for oil and gas companies is online at http://ctj.org/pdf/energy20100709.pdf.
Text of the CTJ report on the U.S. international tax system can be found at http://ctj.org/pdf/drillingoffshore.pdf.