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House begins considering PPT change Regulations not yet written for this portion of new tax law; BP concerned that changes create further ambiguities in what’s deductible Kristen Nelson Petroleum News
The Alaska Legislature continues to discuss changing allowable deductions in the PPT, the Petroleum Profits Tax passed last year. House Bill 128, the companion to Senate Bill 80 (see story in Feb. 25 issue of Petroleum News) got its first hearing in the House Special Committee on Oil and Gas. The committee began taking testimony Feb. 22 and held the bill.
PPT is a tax on the net, so companies deduct lease expenditures before calculating the amount on which tax is owed; there are also credits for capital investments.
There is an 18-item list in the PPT of what cannot be included in lease expenditures, including a 30-cent per Btu-equivalent-barrel deduction from expenditures “that would otherwise be qualified capital expenditures.”
HB 128 and SB 80 add item 19, excluding costs “related to the repair and replacement of property or equipment that was not maintained or was improperly maintained”; costs “incurred to maintain the operational capability of facilities or equipment shut down because of a lack of or improper maintenance of property or equipment”; and “incremental operating expenses incurred as a result of operating facilities or equipment at diminished capacity when that diminished capacity is caused by the lack of or improper maintenance of property or equipment.”
Determination of costs falling under this item is to be by the commissioner of Revenue in consultation with the commissioner of Natural Resources and the Alaska Oil and Gas Conservation Commission “and taking into consideration the standard practices of the industry.”
Gross negligence? Costs attributable to “fraud, willful misconduct or gross negligence” are already excluded, and Rep. Ralph Samuels, R-Anchorage, said he assumed the state is doing an inquiry as to whether or not what BP did in maintaining Prudhoe Bay transit lines was gross negligence or willful misconduct. He also said that when the PPT was under consideration legislators rejected suggestions by the Alaska Oil and Gas Association “to have a series of things entered into the PPT language and we rejected almost all of them.” The thinking, he said, was that “we would rather have it in regulation where if there’s a tweak that has to be made,” that would be easier to do than going through the legislative process.
He asked what the regulations say about whether or not these costs would be allowed.
Jon Iverson, director of the Department of Revenue’s Tax Division, said the first round of regulations have been adopted by the commissioner and are under review in the Department of Law. But, he said, “this round of regulations does not expressly address the sort of deductions that … would be at issue in this bill.” Things like ordinary and necessary expenses will be addressed in the next set of regulations. He said it will take some time to put the remainder of the regulations together, as work on the second round has just begun.
Could regulations cover it? Asked by Committee Chair Vic Kohring, R-Wasilla, whether regulations that are being drafted “might address the intent of this legislation,” Iverson said he couldn’t answer the question “because we haven’t started drafting the second regs project yet.” When that work starts, “we’ll be working with the concepts that are currently in the statute — … gross negligence … typical industry practices, ordinary and necessary business expenses — honing in on things that would or would not be allowed.”
Iverson said the department supports HB 128.
Samuels asked Iverson if, since the regulations hadn’t been written yet, and the department supports the legislation, “why wouldn’t you just write the regs to do what the legislation says?”
Iverson said the issue “is the amount of authority. Whether or not we have the authority to write any given reg depends on what’s in the statute. … There’s no language currently in the statute that expressly addresses this. … The reason we support it is because it makes it more clear, one way or another, whether we have a certain amount of authority.”
Samuels said he assumed the issue would be litigated, one way or the other; Iverson agreed.
BP concerned with potential ambiguity Tom Williams, tax counsel for BP, told the committee his concern with HB 128 was based not just on his experience with BP, but also on his experience as commissioner of Revenue for the state. The challenge is how to “comply with the tax. There is a lot of potential ambiguity with the existing provisions,” he said.
The proposed legislation adds to those, starting with the word “related.”
Another issue, Williams said, is that the proposed legislation would deny a deduction, thereby create “a penalty or a disincentive against spending money to maintain operational capabilities” if a shutdown was caused by improper maintenance.
“So that means that you don’t want us to spend money to get the field back up and running? Is that really what you mean to do there? Because that’s the economic incentive you’re doing, is you’re penalizing people for being ready to get the field back up into production as soon as they can. That’s literally what it says: (expense) that is ‘incurred to maintain … operational capability’ of the facilities that are shut down.”
He also questioned the disallowance for incremental operating expenses incurred as a result of operating at diminished capacity. Williams asked if this means the state would “rather see that the diminished capacity is diminished further because you’re being discouraged from spending the money to keep the capacity as high as possible?”
Rep. Mike Doogan, D-Anchorage, asked if the decision to get a field back into operation wouldn’t “be made on bases other than what the State of Alaska’s tax law might be?” Williams said “you do want to get your business up and running as fast as you can, but you still do not ignore the laws of economics. … And you cannot at your peril ignore the tax implications of what you’re doing.”
“If you have … an interruption in production or a curtailment, you want that over with as soon as possible. Why create obstacles to that? Even if they’re obstacles that generally would be stepped over anyway, why create any?” Williams asked.
People in the future will have to live with the specific language in the bill before the committee, he said.
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