Swing And A Miss On Oil Taxes

Todd Shriber
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There was another one of those infamous dog and pony shows on Capitol Hill today and this time it was oil industry executives getting their feet held to the fire. The issue of the day is legislation that could be considered by the Senate as early as next week that singles out five oil giants, Exxon Mobil (XOM), Chevron, ConocoPhillips (COP), Royal Dutch Shell and BP, for tax credits they've been receiving from Uncle Sam on their payments to foreign governments.

I won't get too deep into the weeds and if you want more information, we covered the news angle yesterday (HERE), but basically what is going on here is oil companies could see their taxes jump by $21 billion over the next decade and the proposed legislation would do more harm to the U.S. companies than Shell (RDS-A) or BP (BP), Europe's two largest oil companies.

To make things simple, here's a hypothetical example. These are NOT real numbers. Assume Chevron (CVX) made $100 million in Nigeria last year and paid $20 million in taxes on that profit to the Nigerian government. Under the current system, the company would get a tax credit from the U.S. so as to avoid double taxation. Not surprisingly, this policy has its supporters and its detractors, but the debate over oil industry profits and the taxes these companies pay underscores a more important point and that is the U.S. tax code is simply broken on many levels.

Actually, the debate over taxing what oil companies make in foreign locations should be opening another discussion, but unfortunately it is not. That discussion should be about why so many U.S. firms that are flush with cash right now from any number of industries are stashing their cash offshore. And the reason is because of the punitive consequences of repatriating that money back to the U.S.

Apple and Microsoft (MSFT) have close to $90 billion combinen in cash and cash equivalents on hand, but much of that is kept offshore to avoid U.S. tax consequences. That is exactly why Microsoft, with over $43 billion in cash on hand, would issue debt to raise its dividend and it is almost certainly part of the reason why Apple (AAPL) does almost nothing with its cash. No dividend. No big acquisitions. Nothing.

There are other examples like this, many from tech land, but the point is not what industry these companies hail from. The point is tax policy in this country, particularly involving international taxes, is broken. A while back I mentioned that I have a family member that works in Japan. He pays taxes to both Japan and the U.S. yet he does no work and earns no money in the U.S. On the other hand, one could come to the U.S. to work from any number of other countries and only be obligated to pay taxes to the U.S., not their home domicile.

The smart thing to do would be to entice U.S. companies, regardless of industry, to bring more of their foreign profits back into the U.S. Go in the opposite direction from where some want to go now and actually offer a tax break if the companies invest those foreign profits in job creation and higher dividends, both of which would generate more revenue for the IRS. Seems like a win-win to me.

Todd Shriber