‘Dual Capacity’ Tax Elimination: Another US Energy Harakiri

Since the collapse of the Soviet Union in 1991, the United States has presided over global affairs as the world’s sole superpower. Now, China’s gunning for our spot. BNP Paribas and Goldman Sachs forecast respectively that China’s economy will outperform America’s as early as 2020 or 2027.

Faced with this burgeoning competition from the world’s most populous nation, America would be greatly disserved by policies that would undermine our competitiveness in the global market. Yet, the Obama administration’s continued push to re-write our current tax code by way of eliminating “dual capacity” tax protections for our oil and natural gas multinational companies would unequivocally derail this necessary commitment.

China’s voracious energy demand, coupled with the increasingly global prowess of the country’s state-owned oil and natural gas concerns, means that American firms must be as strong as possible to successfully compete in a global energy market that will only become more dynamic.

Currently, “dual capacity” tax treatment allows our energy companies an exemption from U.S. income taxes on the revenue they generate overseas, thus protecting against double-taxation of that foreign income. Even with these protections, our energy multinationals consistently record some of the largest income tax expenses relative to other U.S. companies. How does that happen? In addition to the more than $388 billion it paid to our federal and state governments between 1981 and 2008, the U.S. oil industry shelled out $683 billion to foreign governments.

Recent investment activity by Chinese companies in our spheres of influence – and in fact, in our own backyard – reinforces the need to maintain protections like “dual capacity”. Take for example recent news that the China Petroleum and Chemical Corporation (Sinopec) is well on its way to securing roughly $4 billion in financing to partake in Canada’s growing oil sands production, or the China National Offshore Oil Corporation’s (CNOOC) $2 billion buy-in to the Eagle Ford shale gas project in South Texas. In 2010 in South America alone Chinese oil companies made investments amounting to $60 billion.

If the White House succeeds in adding an additional $36 billion tax burden to U.S. fossil fuel producers, China will become even better equipped to not only meet the demand of its own citizenry, but also dictate the price of essential commodities. That would mean less-secure, more expensive energy for America; thus compromising our ability to maintain our way of life. Some think that elimination of “dual capacity” taxes may even be a violation of the World Trade Organization (WTO) rules.

In contrast to Treasury Secretary Timothy Geithner’s promise that the president’s proposed corporate tax reform would create a “level playing field,” the White House’s tax plan would handicap U.S.-based firms and enable China’s rule to be even more pervasive in the global energy markets. Energy means power and not just the one generated by it for electricity and because of bad policies in the US we are witnessing the largest transfer of power in the history of the modern world. And all without a fight.