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Ruggiero: Less complicated taxation system better Consultant recommends stable petroleum system, profit-based, not price-based, with NOLs applied only against production KRISTEN NELSON Petroleum News
If Alaska’s petroleum taxation system were simplified it would make audits easier as well as making paperwork more straightforward for companies paying production taxes in the state.
Such a system would be based on profits not prices and taxes would be bracketed, as are federal income taxes, reducing paperwork and issues at audit.
That was the main takeaway from what the House Resources Committee has been hearing from Rich Ruggiero of Castle Gap Advisors, a consultant hired by the Legislature to advise on the state’s fiscal system.
The committee has been considering House Bill 111 which addresses credits and would increase taxes by raising the minimum tax and eliminating deductions which can be taken to reduce the minimum tax.
Resources co-Chair Geran Tarr, D-Anchorage, said at the end of a March 1 hearing that the committee was looking at making changes to the bill based on some of what they’d been hearing from Ruggiero. She said ideas under consideration included carrying forward net operating losses and eliminating the ability of taxpayers to convert those NOLs to cashable credits by requiring that all NOLS be applied against future taxes. Improvements in data transparency are also under consideration, she said, along with ideas Ruggiero presented on how to keep the state competitive for oil and gas investment. The committee took public testimony at an evening hearing March 1; the committee is next scheduled to hear the bill March 6.
Net system The state’s royalty is on the gross, Ruggiero said, and he recommended that the state keep the rest of its petroleum taxation system on the net. He said the existing combination of gross and net taxes with trigger elements based on both price and margin makes the state’s system complex and leads to unintended results.
There has been a call for stability, but the goal should be durability, Ruggiero said. He recommended a self-correcting system with triggers based on profits not price, which he said would show industry that the state will share with industry the pain of low prices and the gain of high prices. He said that some of the most durable systems worldwide have not been stable, but have responded to changes within an existing framework.
The state should stay with ring fencing by operator and simplify the system where possible.
On the subject of carry-forward losses, he said that typically a company coming into a country carries its losses forward until it has production, while a company which only explores and never produces carries the whole loss. Alaska is ahead of the game because it allows explorers credits for their losses if they are unsuccessful. That is an attraction to new players to come to the state and explore, Ruggiero said.
He did recommend that for an unsuccessful explorer leaving the state, cashable credits have conditions under which they can be claimed, including: the company is leaving the state; contractors have been paid; and leases are being relinquished.
There should also be some form of “uplift,” interest on the NOL, to allow for the time value of money because a company developing a new field could be years from being able to claim NOLs against its production tax liability, Ruggiero said.
Countries have also used “uplift” to encourage rapid development by, for example, offering 100 percent uplift if the project was brought on within seven years. If a company could bring a project online in a shorter time, it had the benefit of the uplift for the years short of seven; after seven years the company has to bear the cost of the time value of money itself.
Transparency Ruggiero said that as stewards of the state’s resources, the Legislature should establish a comprehensive data transparency program. To House Resources and later in the day to Senate Resources, he said that in other areas where he has worked agencies which are equivalent to the Alaska Department of Natural Resources and the Alaska Oil and Gas Conservation Commission have data on field operations, well operations and costs which are publicly available. The issue the state faces, he said, is that the Department of Revenue is the source of data and it is constrained because information has been received as part of tax filings and is confidential.
Commissioner of Revenue Randy Hoffbeck was asked in Senate Resources if he could provide cost data by operator and said he could not. Revenue is able to aggregate data, he said, and that is available in the Revenue Sources Book and can be presented to legislative committees, but is not available by operator or by project.
Ruggiero told House Resources that transparency should allow the state to determine, for example, that there is no duplication of facilities being built just because companies couldn’t come to commercial agreements. That is an issue, he said, because the state is essentially a partner in facilities’ costs under its taxation system.
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