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Revenue making progress on exploration tax credits Alaska Oil and Gas Association hopeful but still uncertain about new regulations Larry Persily Petroleum News Juneau Correspondent
The Alaska Oil and Gas Association says the Department of Revenue is making progress toward improving its proposed regulations for the state’s new exploration tax credit program, although the association still has some concerns.
“I know we’re being listened to,” said Judy Brady, AOGA executive director. “I am optimistic that this is going to be a regulation that follows the very clear intent of the legislation.
“The legislation that prompted these regulations was very clearly focused on new exploration,” Brady said. “The purpose is not to get every (tax) dollar you can … but to encourage new investment.”
Alaska lawmakers in May passed legislation allowing up to a 40 percent credit against oil and gas production taxes for the cost of exploration work in the state. The tax credit legislation moved through the House and Senate in just two weeks during the final month of the session, winning passage by a 46-10 majority in the two chambers. The governor and legislative leaders heavily promoted the tax credit program as a key step toward attracting increased investment to the state.
Industry has concerns The industry association, however, remains concerned that the final regulations may fall somewhat short of the Legislature’s intent. “We would like to see the department break out of the very appropriate auditor’s glasses. By appropriate I mean for most of the work they do,” Brady said. AOGA’s comments were based on the department’s second draft of the proposed regulations, which were revised after written testimony was accepted in August.
A hearing was held on the revised regulations Sept. 5, with the department expected to forward its final proposed regulations to the Department of Law for review by Sept. 18. AOGA had not yet seen the final set, which included additional changes after the second round of comments.
Tax Division Director Dan Dickinson said the association provided the only comments received on the regulations. The association, in its comments on the second draft of the proposed regulations, raised the same key issue it had brought up during the first round of comments. “The revised draft also clings to the ‘traditional’ philosophy,” AOGA said, “that the Department of Revenue will rely on the audit as its tools for sorting out whether any particular cost item should be included in the credit calculation.”
Industry questions discretionary authority The association objected to the provision that would give the department the authority, at its discretion, to prorate between exploration and non-exploration activities or to “deny a claimed exploration expenditure that it determines not to be reasonably required or not incurred for qualified exploration activities.”
AOGA said, “This provision would give the department carte blanche to make unanticipated and potentially major readjustments to the amount of the credit, years after the go/no-go decision for a project is made.
“This mindset of leaving the details of the credit to be worked out on audit will guarantee the partial if not outright failure of the exploration credit as a meaningful incentive for oil and gas exploration.” Dickinson said he understands the industry’s concerns of wanting certainty in knowing its tax liabilities before making investment decisions, and said the department was doing its best to answer AOGA’s criticisms. Statute lists exclusions One problem, Dickinson said, is that the statute lists several categories of expenditures that are not eligible for the tax credit — such as engineering costs — and he does not want to adopt regulations that narrowly interpret individual words to the detriment of legislative intent.
The statute says the tax credits may not include costs of “administration, supervision, engineering, or lease operating costs; geological or management costs; community relations or environmental costs … or other costs that are generally recognized as indirect costs or financing costs.”
Clearly the Legislature intended that not all costs would be eligible for the tax credits, Dickinson said, acknowledging the hard part with the regulations is defining those ineligible expenses. “We want to make it as clear as we can,” he said. The Department of Revenue, during legislative discussion of the tax credits, estimated the four-year tax break, starting July 1, 2003, could cost the state between $50 million to $100 million a year in reduced production tax revenue, with the potential for higher tax revenue in future years if the exploration work is successful.
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