The short answer is no, according to the American Petroleum Institute. The API compared oil and gas to other industries in terms of profit margin and effective tax rate. The oil and gas industry-wide profit margin is 7.3%, which is lower than manufacturing (8.6%), computers and peripherals (9.7%), pharmaceuticals (16.0%) and beverage and tobacco products (19.3%).
The effective tax rate of oil and gas companies is 44.6%, which is greater than healthcare (34.9%), utilities (32.6%), S&P industrials (30.0%), banks and insurance companies (29.3%), computers and peripherals (25.6%), pharmaceuticals (21.3%).
That “Big Oil” is against the common man is promoted by many detractors of the oil and gas industry. But ownership of oil and gas companies is not dispersed like you might think. According to the API, pension funds own 31.2% of oil and gas companies, individual investors own 21.1%, and IRAs own 17.17%. Institutional investors (“Wall Street”?) own only 6.6%.
Go to http://www.api.org/tax for more information on the oil and gas industry and taxes.
The Next Question: What would happen to independent producers if proposals in Congress to repeal tax treatment of domestic companies are successful?
According to a Texas Society of CPA committee report, congressional proposals to repeal tax treatments of domestic oil and gas E&P would be detrimental to the industry, and not particularly beneficial to the federal government.
Among the facts the report notes are:
• 95% of the nation’s oil and gas wells are drilled by independent producers, who employs on average, no more than 12 people each. Note to Congress: The tax repeal proposals are not about “Big Oil”.
• The Administration’s FY 2014 budget proposal estimates that repealing the provisions would generate over $90 billion in tax revenue through 2023. This extra money will come from somewhere, to-wit, the pockets of independent oil and gas producers.
• 50 largest independents reinvest 150% of their cash flow back into new domestic production.
• Oil and gas businesses pay $100million per day in taxes.
Among the tax benefits the Administration wants to eliminate are:
• Deduction for IDCs
• Percentage depletion
• Domestic production activities deduction
• Deduction for tertiary injectants
• Amortization of geological and geophysical expenditures
• Use of LIFO method to account for inventories
• Exception to the passive loss limitation rules for working interests
The report explains the benefit of each of the deductions and the how elimination of each might affect the oil and gas industry.
Without rapid recovery of drilling expenses, investors face a high-risk venture with, at best, a long-term return of their investment. The overall impact of these deductions is to match up current deductions with current risks. This encourages investment in the business (a policy this Administration does not favor). In the case of IDCs, the report notes that permitting the deduction upfront has no effect on long term revenues; the government will collect the revenue sooner or later.
A musical interlude which, if you’ve been here before, is totally predictable.