Tax enhance proposals for fossil fuels detailed within the “Greenbook” of the Ministry of Finance – Tax

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On May 28, 2021, the US Treasury Department published its general explanation of the government’s proposed revenue for fiscal year 2022, also known as the “Greenbook.” The Green Paper provides additional details on the previous proposals by the Biden Administration (discussed here and here) to increase taxes on fossil fuel activities as part of their American Families Plan. It remains to be seen whether these proposals will be implemented in law.

Abolition of “tax preferences” for fossil fuels, including the MLP tax regime

The Green Paper proposes removing 13 identified “tax preferences” currently enjoyed by the fossil fuel industry. This repeal is expected to generate $ 35 billion in tax revenue over the ten-year period through fiscal 2031. Six of these proposals (all effective for tax years starting after 2021) would account for over 80% of this projected revenue:

  • Cancellation of the deduction for intangible drilling costs,
  • Removal of percent depletion for oil and gas wells,
  • Removal of 15% credit for eligible costs related to increased oil production projects,
  • Removal of the deduction for tertiary grout used as part of a tertiary recovery method that increases the recovery of crude oil,
  • Increase the two-year payback period for geological and geophysical expenses from independent producers to seven years, and
  • Removal of percent depletion for hard mineral fossil fuels.

The Green Paper also proposes to abolish the pass-through tax regime for MLPs / PTPs with creditable income and profits from activities related to fossil fuels with effect for tax years from 2026. This proposal is expected to raise about $ 1 billion over five years (2027 to 2031.).

For a full list of the 13 tax preferences identified, the proposed effective date for their abolition and the expected increase in tax revenue, click here.

Reintroduction, expansion and doubling of the superfund excise rate

The Green Paper proposes reintroducing the Superfund excise duties, which expired in 1996 (which are described in more detail below), at double their previous rates. The scope of excise duties would also be extended beyond conventional crude oil and its products to include other crude oils derived, for example, from sources such as bituminous deposits and kerogenous rocks. The reintroduced and expanded taxes would apply to taxable periods beginning after December 31, 2021 and expiring after 2031. They are expected to generate revenues of $ 25.3 billion over a ten-year period.

Details on the Superfund excise duty on crude oil

The superfund was partially financed by a consumption tax of 9.7 cents per barrel of crude oil, which was in effect from 1987 to 1995. Click here and here to view the expired statute. It has been levied on refiners, importers, users, and exporters in the same way as the current 9.0 cents per barrel excise duty Oil Spill Liability Trust Fund (recently extended to 2025). The Greenbook’s proposal to double the historic rate would mean that the new excise tax rate would be 19.4 cents per barrel.

Details on Superfund excise duties on selected chemicals

From 1987 to 1995 an excise duty was also levied on the sale of 42 specific chemicals by the manufacturer, manufacturer or importer. Click here and here to view the expired Articles of Association. The tax rate ranged from 22 cents to $ 4.87 per ton. The highest price ($ 4.87 per tonne) was for certain petrochemicals unless they were used for a “qualified fuel use”: acetylene, benzene, butane, butylene, butadiene, ethylene, naphthalene, propylene, toluene, and xylene. A rate of $ 3.44 per tonne for methane not used as fuel, used as fuel, or put on “qualified fertilizer use”.

A similar tax is levied on the importation of other chemicals sold or used by an importer, provided that the 42 listed chemicals accounted for more than 50% of the weight or value of the chemical, including 50 chemicals expressly specified by law as meeting this requirement are shown. Click here and here to view the expired Articles of Association.

The Green Paper proposes reintroducing these taxes, also at double their historical rates.

Change the Financing of the Oil Spill Liability Trust Fund

The Greenbook also suggests widening the scope of the 9.0 cents a barrel excise duty, which finances the Oil Spill Liability Trust Fund, to (1) cover other crude oils, for the interpretation that is currently “pulling back” that tax allowed when exporting taxable products. These provisions are expected to generate revenue of $ 513 million over a ten year period.

Change the taxation of foreign fossil fuel revenues

The Green Paper proposes removing the current law exemption from global intangible low taxed income (“GILTI”) for foreign oil and gas exploration revenue (“FOGEI”) and codifying the safe haven for taxpayers with double the capacity established in the current Treasury it contains regulations for determining the share of the tax that is paid for a specific economic benefit (the Safe Harbor is the only method for determining the chargeable share of the tax). These proposals would generally apply to tax years beginning after 2021 and are expected to raise $ 86.2 billion over the ten year period through fiscal year 2031 (98% of which is due to the lifting of the FOGEI exemption from GILTI).

For a fuller discussion of the Greenbook’s international tax proposals, click here.

We will continue to monitor developments and provide further updates as more details are released. In the meantime, Baker Botts will be happy to assist you in analyzing these suggestions.

The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.

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