The Internal Revenue Service took an important symbolic step yesterday toward closing one of the last major avenues by which big U.S. oil companies can escape millions of dollars in taxes on their foreign operations.
In a series of rulings, the IRS revoked several long-standing policies that have enabled the oil companies to offset their U.S. taxes on foreign-source income by the amount they pay in royalties or extraction taxes to oil-producing countries, based on artificial "posted" prices.
The decision in theory is a setback for the oil companies. If all other things were equal, it would mean that beginning next June 30, these companies would be able to treat such payments only as a regular business deduction, and not use them to offset their taxes.
Treasury experts say that could cost the oil companies an estimated $600 million a year. Yesterday's rulings apply only to two countries -- Saudi Arabia and Libya -- and only to royalties paid after June 30. The rulings are not retroactive.
In practical terms, however, the impact of the new rulings is less certain. For one thing, the oil-producing nations may rejuggle their tax-and-royalties systems. Saudi Arabia, for example, is said to be on the verge of scrapping its use of "posted" prices.
For another, some tax experts fear the United States companies could reorganize to get around the new rulings. Or, some companies may choose to absorb the higher tax burden or else pass it on to consumers in the form of higher prices.
The Treasury estimated that if the increase were passed on in the form of higher prices, it would result in a maximum rise in gasoline prices of less than one-tenth of a penny per gallon.
Despite their uncertain impact, the rulings yesterday were expected to prove controversial. The major U.S. oil companies have been opposing any such move for years, while tax "reformers" have been urging that the provisions be revoked retroactively.
Rep. Benjamin S. Rosenthal (D-N.Y.), chairman of the House Government Operations consumer affairs subcommittee, who had pressed for early action on the rulings, complained that the fact that they were not made retroactive amounted to "an outrageous giveaway."
In a statement issued after the Treasury announcement, Rosenthal contended that if IRS had made the changes effective as of mid-1976, when it announced it was reviewing the earlier policies, the government would have received $1.5 billion in additional revenues.
However, private tax experts expressed doubt that the rulings would result in any sizable increase in revenues to the Treasury. The bulk of the abuses stemming from the earlier policy were eliminated in 1975. At that time, Congress limited the use of the writeoff to cases where the royalty amounted to a tax rate of 50 per cent or more. At the same time, the oil-producing countries nationalized the companies' drilling operations within their borders.
Yesterday's rulings were based on two important decisions concerning royalties or extraction taxes:
That these royalties or extraction taxes don't qualify for the U.S. foreign tax credit because they're imposed even if the oil companies never actually sell the petroleum they buy, and therefore technically aren't income taxes, as U.S. law requires.
That "creditable" taxes can't be based on so-called "posted" prices --the artificially high prices some oil-producing countries set for internal purposes. Such prices have no direct relationship to the prices actually paid by the oil companies.
Along with the rulings on the oil company credits, the IRS also issued two other decisions dealing with the use of the foreign tax credit by U.S. firms.
The first denies the use of the credit for certain taxes imposed by Haiti, France, India and Cuba, and reaffirms an earlier ruling allowing the writeoff for a Mexican tax on Mineral royalties.
The second denies the tax credit for a mining tax imposed by the province of Ontario, Canada.