Bill Bush | 202.682.8114 | bushw@api.org

WASHINGTON, February 8, 2011 – U.S. oil and natural gas companies will not be able to successfully compete against their foreign counterparts on many international energy development projects if longstanding rules on taxing foreign income are changed, according to a newly released study by Wood Mackenzie.  Legislative proposals put forth by the Administration would significantly alter how foreign tax payments by U.S.-based companies on their foreign income would be treated for U.S. income tax purposes – essentially subjecting them to double taxation on foreign operations.  As a result, U.S. companies would face potentially lower returns investing in foreign oil and gas projects, would bid on fewer projects, and successfully bid less often.

“Revising the rules in this way would surely hurt U.S. companies and U.S. workers,” said Stephen Comstock, API tax policy manager.  “If U.S.-based companies are forced to withdraw from an oil and natural gas development abroad because a new law instantly turns it uneconomic, that affects jobs at home and it potentially reduces revenues.  I agree that this provision would raise money, but not because it closes some loophole or fixes some existing problem.  It merely subjects our companies to double taxation.”

The study, which was sponsored by API, compares internal rates of return under the existing U.S. tax rules versus proposed new rules for taxing foreign income.  It says the change would provide an enormous investment advantage to our international competitors operating under the old rules, resulting in net present values of development projects to foreign investors as much as 110 percent greater than to U.S. investors.  The study concludes, the “proposed changes that would apply only to U.S.- based investors are likely to make them less willing to invest in overseas opportunities and may also make it attractive to them to dispose of overseas assets where the value of the asset to a non-U.S. company is significantly greater than that to a U.S.- based investor.” 

The study, US/Overseas Tax Analysis, completes a suite of tax studies prepared by Wood Mackenzie for API that assessed employment, investment, production and revenue impacts of increasing taxes on the industry.  Evaluation of Proposed Tax Changes on the US Oil & Gas Industry, an analysis of the impacts of changing intangible drilling cost expensing and the domestic manufacturing (s.199) deduction, was published in August 2010.   Energy Policy at a Crossroads: An Assessment of the Impacts of Increased Access versus Higher Taxes on U.S. Oil and Natural Gas Production, Government Revenue, and Employment, which evaluated the impacts of a $5 billion per year tax increase on the industry, was issued in January 2011. 

API represents more than 450 oil and natural gas companies, leaders of a technology-driven industry that supplies most of America’s energy, supports more than 9.2 million U.S. jobs and 7.5 percent of the U.S. economy, and, since 2000, has invested nearly $2 trillion in U.S. capital projects to advance all forms of energy, including alternatives.