State tax credit certificates don’t go bad just because an oil and gas explorer merges with or sells to another company.
That’s the upshot of an “advisory bulletin” the Alaska Department of Revenue’s Tax Division issued Sept. 23.
The advisory says a company that absorbs or acquires another firm holding tax credit certificates, which the state awards to encourage exploration spending, can cash in those certificates with the state provided certain rules are followed.
The state issued the three-page advisory after “a business in Alaska” requested it. State officials held the name of the business confidential.
The advisory bulletin sketches out a couple of scenarios involving three firms, one of which is described as an “independent explorer” holding tax credit certificates based on its past qualifying exploratory expenditures in the state.
This company merges with or sells out to either another independent explorer already working in the state, or a new independent explorer that’s just arriving.
Either way, generally, the certificates belonging to the company that goes away as a result of a merger or sale are still good, the advisory bulletin says.
The bulletin notes the opinion does not apply to the transfer or reassignment of tax credit certificates as part of a bankruptcy proceeding.
Sixth advisory so farThe state Tax Division has done half a dozen such advisory bulletins since the office gained authority to do them under Alaska’s Clear and Equitable Share, the oil production tax reform the Legislature passed in late 2007.
“We created this authority for ourselves in ACES,” said Marcia Davis, the state’s deputy revenue commissioner.
It was needed because industry would often ask whether the state could advise on how a given activity, situation or deal would be treated for tax purposes, Davis said. State officials wanted the capacity to offer such guidance, she said, much like the IRS does.
State officials are happy to address questions not just from oil companies, but from nontraditional players, Davis said.
“It doesn’t have to be a taxpayer. It could be someone from outside the state contemplating doing business in Alaska,” she said.
Prior advisory bulletins addressed such questions as whether oil recovered from North Slope waste streams would be subject to the state’s oil and gas production tax (it wouldn’t, tax officials advised); whether a geophysical company is considered an “explorer” eligible for tax credits when it undertakes seismic work on spec (it is); and whether natural gas used in a manufacturing process such as making fertilizer is considered an in-state use of gas eligible for a production tax break (yes and no).
All six advisory bulletins are available at www.tax.state.ak.us/programs/whatsnew.aspx.
Credit cashouts mountIn July, the Department of Revenue announced the state had paid $193 million in cash over the preceding fiscal year to oil and gas explorers in exchange for tax credits they had accrued for making investments in the state. The money went to 15 explorers not yet producing any oil or gas in Alaska, the department said.
So far this fiscal year, which began July 1, “we have processed and approved the cash purchase of $72,566,816 in tax credits,” Davis told Petroleum News in an Oct. 7 e-mail.
The credits are essentially advance rebates on future taxes that companies will owe once they begin production. Companies present proof of their spending to the state to build tax credits and swap them for cash.
State officials recognize that a big challenge for oil and gas explorers is the huge expense they must risk upfront before they ever produce the first barrel, state Revenue Commissioner Pat Galvin told Petroleum News in July. By allowing them to cash in tax credits with the state, the belief is it helps encourage exploration and investment.