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Administration releases ACES draft Revenue Commissioner Galvin says no unexpected difficulties encountered — bill reflects principles governor outlined in September Kristen Nelson Petroleum News
Information and auditors, along with an increased tax rate, are key aspects of the draft bill for a new production tax — “Alaska’s clear and equitable share” or ACES — introduced by the administration of Gov. Sarah Palin Oct. 1.
ACES would replace the petroleum profits tax or PPT enacted by the administration of Gov. Frank Murkowski in August 2006, raising the net tax rate from 22.5 percent to 25 percent and making a number of other changes.
In an Oct. 2 press briefing Revenue Commissioner Pat Galvin said the bill “captures the principles described by the governor” when she introduced the ACES concept in early September: a more transparent tax system and increased public confidence.
Galvin said there weren’t any unexpected problems found in drafting the bill that caused changes in the principles described Sept. 4.
He said he wanted “to reiterate that PPT does not protect the state’s interests. We need the tools provided by ACES, the equitable share that will restore public confidence in our oil tax system and provide a stable, attractive investment climate that we need to promote additional oil development on the North Slope.”
He noted the state has “not said that ACES improves the investment climate. Clearly, there’s going to be a larger state share and that isn’t going to make the economics of projects better.”
“But what we’re saying is that we can increase the state’s share while not causing investment to leave the state,” Galvin said.
Auditors addressed in bill The bill provides for an exempt class of oil and gas auditors and supervisors.
Galvin said that in discussions during the transition when the Palin administration took office at the end of 2006, “one of the things that struck me was we were looking at professional positions (oil and gas auditors) that in the private sector make north of say $200,000. What we’re able to pay is significantly less than $100,000.”
He said the administration doesn’t expect to match private sector salaries, but believes there are benefits of public service and working for the state that can fill some of that gap. “But we need to get closer than we currently are,” probably somewhere in the $150,000 range.
Asked about contracting for audit services, Galvin said the state looked at that as a short-term solution. To rely permanently on contracting, he said, would make the state “dependent upon the expertise of a non-state entity and we believe this is so critical to the state that we need to ultimately have the bulk of the decision making being done in-house by experts who work solely for the state.”
Contracting will help the state in a two- to three-year transition period as it builds up in-house expertise, he said.
State wants more info, sooner Galvin said he thinks that discussion with lawmakers will focus on the numbers — the tax rate, the progressivity, how the increase in rate is calculated.
But he said he thinks ultimately a lot of the discussions will “center around the areas that deal with information needed by the state.”
The bill requires two types of information from oil and gas taxpayers: information about the tax they are paying — on both a monthly and in more detail on an annual basis — and prospective cost information that will help the state forecast what its revenues will be.
“And I expect that to get a lot of attention because it’s a fairly new venture for the state.”
Galvin said getting “reports on a timely basis” of how the companies calculated the tax due, as well as forward-looking projections of what their expenditures will be, “are all critical parts for the state to be able to protect the state’s interest and anticipate what our participation in this process is going to be, what the implications are going to be for state revenues and ultimately to be able to make sure that full compliance is taking place.”
The state was “off by quite a ways” in projecting what costs would be under PPT, due largely to “the fact the state has never gotten that information from the companies, even though I believe the state has every right to ask for it and should have gotten it years ago.”
The information the state will be asking for is “the information that’s provided to other partners, prospectively looking at what expected expenditures are going to be for a particular field over the next period, whether that be a year or two out, so that we can better anticipate what expenditures are going to be … and then ultimately track whether those are taking place,” he said.
The state has never had access to this information, Galvin said, and the information issue was not addressed when PPT was put forward “and we feel that it was a significant oversight if we’re going to have a tax system that’s going to be reliant upon the state’s participation in these fields’ economics as much as PPT” and also ACES. With a net tax system, he said, “we absolutely need to get this information in order to be responsive to the public in implementation of this type of a tax system.”
Information now years late The state does get information now, he said, but that information isn’t available until the state gets into the auditing process.
And that takes a long time.
He said a tax return for calendar year 2006 is due in April of 2007 and the state would expect that return to be updated after the companies file federal tax returns in the fall. Auditing probably wouldn’t begin until the following winter, “a year removed from the calendar year in question.”
And that’s just the beginning of the audit process.
If that’s the only way the state can acquire cost information, “we’re looking at a lag time of years before the state understands the nature of the tax returns of a particular calendar year.”
Under ACES the state requires information with monthly payments and more detailed information with the annual return; it also requires “forward-looking cost information,” Galvin said.
“And this means that we’re going to get a look at the cost data ahead of when the actual expenditures take place. So rather than being a couple years behind, we’re going to try to get a couple years ahead in terms of understanding how the economics of the fields are changing or how the tax bills are going to be affected.”
Galvin said that in talking with consultants who work around the world, a net system is standard everywhere except in the United States.
As for information, “what we’re learning is that most other places around the world have much more detailed knowledge of the oil and gas economics than Alaska does and what we’re doing here is just trying to catch up to the standard that exists around the world.”
Galvin said a portion of the information received from the companies “could be public.” He said the bill attempts “to balance the appropriate proprietary information and the confidentiality that’s inherent in the tax information” while making the tax more transparent to the public.
The bill requires that “information can only be made public if it’s an aggregate of at least three taxpayers” and meets other criteria specified.
Tax rate goes up to 25% ACES increases the tax rate on the net to 25 percent with a progressivity factor of 0.2 percent. The progressivity trigger is lowered from $40 per barrel to $30 per barrel (net) and the calculation is done annually instead of monthly.
There will be a 10 percent gross tax floor on legacy fields — those that have produced more than a billion barrels historically and still produce more than 100,000 barrels per day. For those fields the tax would be the greater of a 10 percent gross tax or 25 percent on the net. Only Prudhoe Bay and Kuparuk fall into that category, Galvin said.
Cook Inlet producers would be prohibited from utilizing the Cook Inlet tax ceiling to export tax credits to other areas of the state, an issue Galvin said was fixed in PPT regulations, but was included in ACES so that it would be in statute. ACES also limits the use of capital credits generated in legacy fields — those subject to the 10 percent gross tax floor — to taxes on oil and gas from those fields.
And ACES limits to 50 percent the amount of a capital credit that may be claimed for a single calendar year.
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