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Republican tax plan offers mixed bag for energy: Update

27 Sep 2017, 8.04 pm GMT

Republican tax plan offers mixed bag for energy: Update

Adds details throughout

Washington, 27 September (Argus) — Energy companies will find things to like in a tax plan backed by President Donald Trump that would cut corporate rates to 20pc, although some prized deductions could be lost.

Republican leaders today released the most details to date in their tax overhaul plan. The plan was written by the Republican chairmen of the House and Senate tax-writing committees and senior administration officials including US treasury secretary Steven Mnunchin. Supporters say cutting tax "loopholes" in favor of lower corporate rates will supercharge economic growth and help US companies compete with their foreign counterparts.

"Our country and our economy cannot take off like they should unless we dramatically reform America's outdated, complex and extremely burdensome tax code," Trump said in a speech in Indiana. "It is a relic. We have to change it."

The plan would cut corporate rates from an existing top rate of 35pc, eliminate taxes on foreign profits and allow companies to immediately write off the cost of capital investments for at least five years. Those policies could mean lower taxes for US-based oil companies with operations around the world. And the oil industry is cheering the plan for immediate expensing of capital, which they say will free up cash to reinvest into new projects.

But Republicans are also proposing to eliminate tax policies the energy sector has staunchly defended in the past, and the plan to enact tax changes within three months leaves the industry with little time to analyze potential impacts. The tax changes will create winners and losers among oil companies, refinery owners, pipelines and other energy companies, depending on the structure of their businesses, levels of capital spending and reliance on debt.

The tax plan would retain an existing credit for research and development spending. But it would limit, by an unspecific amount, deductions on interest payments that pipeline owners and other debt-reliant energy companies say are crucial to raising capital. It would scrap a manufacturing tax deduction called "section 199" the oil sector has rallied behind in the past, while casting doubt on a major deduction for "intangible" drilling costs that oil and gas producers want to retain.

The plan does not specifically mention the drilling cost deduction, but it envisions repealing most business tax credits in favor of lower corporate rates. Although the industry generally supports the Republican tax effort, uncertainty around deductions and other unknowns have made it difficult for oil companies to analyze what the plan would mean for their bottom lines.

"The inclusion or elimination of specific tax provisions, yet to be outlined, will be crucial to evaluating this tax reform plan," oil industry group the Independent Petroleum Association of America's president Barry Russell said.

Oil and gas companies say targeting existing tax deductions could have negative long-term consequences for an industry that makes about $230bn/yr in capital investments. American Petroleum Institute president Jack Gerard said lawmakers should include "strong cost-recovery provisions," which the oil industry group says should include intangible drilling costs, accelerated depreciation and immediate expensing.

Wind and solar companies face some of the greatest unknowns from the tax overhaul. Reducing the corporate tax rate to 20pc could reduce the benefits of a solar industry investment tax credit, by reducing demand for those tax credits. Solar developers usually sell the credits to third parties to finance projects. The tax plan does not say whether it would attempt to eliminate wind and solar tax credits that, under a bipartisan deal in 2015, are being phased out.

Republicans want to enact the tax cuts using a process called reconciliation that would allow enactment with just 50 votes in the US Senate, avoiding the need for Democratic support. But that process will require them to agree on a budget bill and would have to be sunset after 10 years unless lawmakers show it will not add to the deficit. The maneuver also risks a repeat of Trump's doomed effort to overhaul health care policy, where only three Republican senators could block legislative changes.

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