The Foreign Tax Credit and U.S. Energy Policy
EMD-80-86: Published: Sep 10, 1980. Publicly Released: Sep 10, 1980.
- Full Report:
The foreign tax credit allows U.S. corporations to credit a portion of their foreign income taxes paid abroad against their U.S. income tax liability on this income. The oil and gas industry claims the greatest portion, about 75 percent, of the total foreign tax credit. To counter perceived inequities in the tax treatment of U.S. oil companies, Congress has made several changes to the credit which have restricted its use by the industry. GAO attempted to determine: (1) whether the foreign tax credit, as it currently works, hinders, promotes, or is neutral with regard to achieving the goals of reducing U.S. oil imports and diversifying the sources of imported oil; (2) what alterations to the credit might be required to make tax law more consistent with the attainment of these energy goals; and (3) if it is possible or advisable to use the credit as a tool of U.S. energy policy.
GAO found that the foreign tax credit benefits the oil industry by lowering its U.S. tax burden as against the alternative of claiming foreign taxes as a deduction. Eliminating or further restricting the credit could result in a significant financial loss to the industry and could possibly have an adverse impact on the industry's ability to invest. Elimination of the credit would increase these companies' U.S. tax liability. However, this might be offset by other industry actions, such as passing the cost of additional taxes through to consumers or altering the corporate form of exploration and development activity. However, the credit has had little impact on exploration and development activities to date since taxes are rarely a deciding factor in foreign investment decisions. It was also concluded that the foreign tax credit does not subsidize overseas activity at the expense of domestic activities. The relatively high tax rates in most countries on oil production and the limitations on the credit make foreign activity more expensive than domestic activity from a tax standpoint. Most evidence on the impact of altering the credit points to a negative but marginal effect on such factors as industry profits, competitive standing, and foreign exploration and development activity. It is doubtful that U.S. energy policy would be either enhanced or hindered in any fundamental way by changes to the foreign tax credit.
Matter for Congressional Consideration
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Matter: The merits of the foreign tax credit should be considered primarily on the basis of achieving tax policy objectives. Since the energy impact of changing the credit is small, the credit should not be manipulated for energy policy reasons only. The credit was neither intended to be used for such purposes, nor is it evident that it is an effective energy policy instrument. If tax policy objectives warrant retaining the credit for the oil industry, Congress should consider selective application of the credit to encourage exploration and production activities in non-OPEC areas.