Provisions Increasing Taxes on the Oil and Natural Gas IndustryBriefing Paper

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7.13.10

Some in Congress want to increase federal revenue by repealing or modifying severallong-standing, legitimate tax policies affecting the U.S. oil and natural gas industry. At atime of high unemployment when we are struggling to recover from a recession, theseproposals will threaten U.S. jobs and weaken U.S.-based companies.Repealing the domestic jobs manufacturing deduction for

only

oil and gas activities

Congress enacted section 199 of the I.R.C. in 2004 to encourage

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U.S. manufacturersand producers to invest, expand and create jobs in the United States. The oil and naturalgas industry creates high-paying professional and union positions held by geologists,refinery workers, rig builders and others.Proposals to repeal section 199

just for oil and natural gas

activities could endanger someof the 2.1 million U.S. oil and natural gas worker jobs and 7.1 million U.S. goods andservices jobs supported by the industry. There is no defensible tax policy basis for treatingoil and natural gas activities differently from any other manufacturing or production activities.

Modifying the provisions that prevent double taxation of US companies ("dual capacity")

The U.S. wins when its businesses can compete in the global marketplace. Our tax ruleshave, for almost a century, allowed companies to offset U.S. income tax on foreign earningswith income taxes paid on those earnings abroad

—avoiding a double tax on the company’s

foreign earnings.Currently, the foreign tax credit enables

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U.S. companies to operate and produce goodsand services in other countries without taxing profits twice

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once by the host country andonce again by the home country. This allows U.S. companies to have a level playing fieldamong foreign competitors.Proposals are being considered to restrict this long-standing principle

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and possibly just forthe oil and natural gas industry. U.S.-based oil and natural gas companies would be forcedto pay a double tax on part of their income from their foreign operations

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creating acompetitive disadvantage.These changes would substantially raise the costs and impact operations of U.S.-basedcompanies. As a direct result, foreign entities

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such as national oil companies

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wouldbecome competitively advantaged since they would continue to incur only one level oftaxation in almost all cases. An informal look at some large U.S.-based companies showsthat while almost 80 percent of their 2009 net profits are from foreign sources almost 50percent of their workforce is in the U.S. Many of these U.S. jobs will be at risk if thecompanies were to lose market share to foreign competitors.

Eliminating the ability to expense intangible drilling costs

Intangible drilling costs (IDCs) include the labor for setting up drill sites, designing platformsand drilling the wells

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similar to research and development (R&D) costs. The currenttreatment of IDCs is directly reflected in oil and natural gas industry jobs, and current law