By Brett Clanton, Houston Chronicle
HOUSTON — Obama administration proposals to reap more tax dollars from the foreign-earned profits of U.S. companies are not going over well in the Oil Patch.
Billed as a way to make multinational corporations pay their fair share to Uncle Sam, the measures could add millions to the tax bills of some of the largest oil and gas companies, on top of the billions the industry says it already pays each year in taxes.
At the heart of the effort are calls to end certain tax benefits U.S. corporations have enjoyed, including one that allows indefinite deferral of U.S. tax payments on foreign income and another that offers credits against U.S. taxes for foreign taxes paid.
President Barack Obama’s administration also wants to close what it characterizes as loopholes that have enabled U.S. companies to avoid U.S. tax obligations by shifting foreign profits to subsidiaries located in tax haven countries.
The White House says strengthening international tax laws could raise $210 billion over 10 years, as well as create a greater incentive for multinational companies to invest in the U.S. rather than taking their money and jobs overseas.
But companies in the oil and gas industry, along with a chorus of U.S. business groups, say the measures would penalize them by adding costs, make them uncompetitive with foreign companies and possibly force them to downsize.
“Contrary to statements made by the administration, these proposals will not create U.S. jobs and could even result in U.S. job losses,” said Stephen Comstock, tax counsel for the American Petroleum Institute, an industry trade group in Washington.
The impact could be especially deep in the Houston region, home to more than 350 multinational companies with some 150,000 employees, U.S. Rep. Kevin Brady, R-The Woodlands, told a group of local business leaders last week. “This is going to cost us jobs,” he said, in a presentation to the Greater Houston Partnership.
The proposed changes make good on Obama campaign pledges to crack down on corporate abuse of the tax system and come as the administration is looking for new sources of revenue to fund government programs and plug ballooning deficits.
While a range of U.S. industries could be affected, the measures could be acutely painful for oil and gas businesses since much of their product and profit is derived from foreign countries.
Hitting oil companies
On example is San Antonio-based Valero Energy Corp., the nation’s largest oil refiner, which has operations in the Caribbean. It stands to lose about $30 million in tax deductions per year if all the new rule changes are implemented, company spokesman Bill Day said. Major oil and gas producers could be hit worse.
In 2004, the most recent year for which data is available, U.S. multinational companies paid about $16 billion in U.S. taxes on about $700 billion of foreign profits, for an effective tax rate of about 2.3 percent, according to a recent White House estimate.
The administration said earlier this month that the tax code gives companies a competitive advantage to invest and create jobs overseas and is “rife with opportunities to evade and avoid taxes through offshore tax havens.” It points to a December 2008 report by the Government Accountability Office showing that 83 of the 100 largest publicly traded U.S. companies have subsidiaries in countries that have been labeled as tax havens. On the list are several oil companies, including Exxon Mobil, Chevron, Hess, ConocoPhillips, Marathon Oil, Valero and Sunoco.
The oil and gas industry and other business groups say there are legitimate business reasons for having foreign subsidiaries and that the tax code already contains provisions that prevent abuse.
Leslie Hiltabrand, a spokeswoman for Marathon, said the company creates foreign subsidiaries “to own assets in international projects and avail itself to international banking and corporate law facilities that are widely accepted around the world.”
Valero has subsidiaries in Aruba and the Cayman Islands because it owns and operates a large refinery in Aruba and has insurance in the Caymans, Day said.
Other oil and gas companies cited in the GAO study either declined comment or said they needed to see more details of the proposals before taking a position.
The industry says White House proposals neglect to mention how much the industry pays in U.S. taxes as well as foreign taxes and other costs of doing business internationally.
In 2007, the effective income tax rate of the major oil and gas industry producers was 40.3 percent, according to the U.S. Energy Information Administration. That’s higher than the U.S. corporate tax rate of 35 percent and partly reflects higher taxes paid in foreign jurisdictions.
The industry included at least $211 billion of foreign earnings in its U.S. taxable income for 2004 to 2006, the last year for which data is available, according to an estimate by Comstock using Internal Revenue Service data.
But at the end of the day, analysts doubt the administration will get everything on its wish list, given the far-reaching list of programs it wants to tackle.
“Government has everything in the store sitting in the shopping cart,” said Kevin Book, with Clearview Energy Partners in Washington.
“But when it’s time to get to the cash register, they’re not going to buy it all.”
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