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The tax shield is a little-known advantage to Chevron's
mega-takeover of Hess struck last month. The tax benefits are expected to
provide the No. 2 U.S. oil and gas producer hundreds of millions of dollars in
extra annual cash flow over the next several years.
“The tax benefits were definitely factored into how Chevron
valued Hess,” said Donald Williamson, an accounting professor at American
University’s Kogod School of Business. “The Hess losses will allow Chevron to
lower its tax rate significantly for several years.”
The 1918 Revenue Act first allowed corporations to carry
their losses forward as tax benefits to smooth out large fluctuations in income
over time. But the losses only come in handy if a company is eventually able to
make enough money to have big tax bills.
Before the companies agreed to the $53 billion all-stock
deal, Hess was sitting on more than $15 billion in net operating losses from
previous years and unable to take advantage of them due to low profits and
heavy losses, according to explanations Hess has provided in its financial
statements.
The independent oil and gas driller had been stung badly by
a crash in oil prices in 2016 and had never fully recovered.
Chevron Chief Financial Officer Pierre Breber told analysts
in a conference call shortly after the Oct. 23 deal that Chevron would benefit
from Hess’s past losses.
“When you combine the companies, we have the greater U.S.
income, and we can use those net operating losses,” he said.
The company declined to provide any details about the size
of the benefit.
Williamson explained that a 1986 tax code reform limits how
much net operating loss a company can apply each year to its tax bill - a
provision meant to discourage corporate takeovers just for the sake of
trafficking in net operating losses.
That limit is calculated by multiplying the value of the
takeover by the Applicable Federal Rate (AFR) published each month by the
Internal Revenue Service.
In Chevron’s case, the net operating loss limit applied
against U.S. income taxes could be as high $1.93 billion a year, Williamson
said.
The bottom line effect, when that loss limit is multiplied
by the U.S. federal tax rate of 21%, is extra cash flow that could top $400
million a year.
“There could be some items that would allow the amount to be
higher or lower but this estimate gives a good starting figure,” said Jim
Seida, an accounting professor at the University of Notre Dame.
TAXPAYER ANGST
Taxpayer advocates, already frustrated by low corporate tax
rates, criticized the perk.
“The tax benefits going to Chevron and other U.S.
corporations from net operating losses are absolutely undermining our federal
budget,” said Jean Ross, an analyst at the Center for American Progress.
“There’s a strong and appropriate case to increase the corporate income tax
rate.”
Last year, corporate tax revenue totaled a record $425
billion, according to the Congressional Budget Office.
Over the past decade, Chevron's current U.S. federal tax
expense has averaged $40 million a year. Last year, the company's current
federal tax expense was $1.72 billion, or 8.2% of $21 billion in U.S. income,
according to company financial statements.
Top U.S. oil company Exxon Mobil paid an even smaller
percentage in 2022 on U.S.-based income. Its current federal tax expense last
year was $696 million, or 2.5% of U.S. income of $28.3 billion, according to
Exxon financial statements.
Exxon also will be able to cut its future tax bill somewhat
with its $60 billion takeover deal last month of Pioneer Resources.
At the end of last year, Pioneer net operating losses that
could be used to offset future U.S. federal taxes was pegged at $1.1 billion.
Exxon CEO Darren Woods, however, told Reuters the tax
benefit was not a factor in the company’s decision to buy Pioneer.
“It’s too small,” Woods said after speaking at the Boston
College Chief Executives Club luncheon on Nov. 1.