How Oil Companies Pay Such Low Taxes

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How Oil Companies Pay Such Low Taxes

In the United States, large oil firms have paid much lower taxes than most other enterprises. The main reason is that there are provisions in the United States tax law that enable energy corporations to postpone and avoid paying federal income taxes.

The 2017 Tax Cut and Jobs Act also reduced the effective tax rate for businesses, with oil firms benefiting the most from the reforms due to the ability to defer taxes. Subsidies are also provided to the sector.

Key Takeaway

  • Oil firms pay a lot less in taxes than most other businesses.
  • The ability to postpone taxes is a significant tax benefit for oil corporations.
  • The 2017 Tax Cuts and Jobs Act helped oil businesses even more by lowering the effective tax rate for corporations from 35% to 21%.
  • Oil businesses also get subsidies to aid the sector since oil is seen as a critical commodity.

Tax Deferments for Big Oil

Oil firms may, and often do, postpone federal tax payments. According to a 2014 research produced by Taxpayers for Common Sense, between 2009 and 2013, the 20 biggest oil and gas firms were able to delay payments on up to half of their federal income taxes due to multiple tax provisions in the tax law conferring special status to oil businesses. These businesses paid 11.7% of their pretax revenue, which is 23.3 percentage points less than most other businesses. Some analysts say that the oil and gas business does not get preferential treatment and is taxed in the same way as all other industrial or extractive industries.

  Pretax Contribution Definition

Exxon Mobil (XOM), ConocoPhillips (COP), Occidental Petroleum (OXY), and Chevron Corporation (CVX) are believed to have brought in around 84% of the group’s profits. These firms paid 85% of the group’s income tax, whereas smaller firms paid a far lower share, just 3.7% of their entire earnings in taxes.

Many significant oil corporations prefer to delay federal tax payments in return for debt in the form of federal tax obligations. Between 2009 and 2013, the top 20 smaller corporations deferred more than 87% of their total tax bills. Many corporations stake major portions of their stock on tax liabilities owing to the United States government. Oil firms may deduct such large parts of their earnings because to a tax provision known as the “depletion allowance.”

The 2017 Tax Cuts and Jobs Acts reduced the corporate tax rate, including deferred taxes. The bigger the amount delayed, the greater the savings under the new legislation, since money that would have previously been subject to a 35% tax rate was now subject to a reduced 21% rate.

Between 2009 and 2013, the top 20 smaller corporations deferred more than 87% of their total tax bills.

Subsidies for Big Oil

Subsidies in the form of tax credits and exemptions are also provided to large oil firms. Oil firms, for example, may avoid paying taxes on expenditures linked with the vague phrase “intangible drilling expenses,” which can be found at This 1916 subsidy permits producers to deduct any expenditures that are not directly related to the ultimate operation of an oil well.

  Indirect Tax: Definition, Meaning, and Common Examples

Intangible drilling expenses might include expenditures connected with new equipment or drilling infrastructure, as well as futile attempts to drill in new places. Deducting all of these costs reduces the amount of tax owed.

The Other Side of the Argument

While oil firms enjoy several tax breaks in the United States, they face harsher taxation elsewhere. As a consequence, many oil corporations pay income tax to other countries, and profits from deferred income taxes in the United States are often utilized to pay tax owing overseas.

The tax breaks granted to oil firms may generate the appearance that the American public is essentially financing a multibillion-dollar sector dominated by a few huge corporations. It might indicate a kind of nepotism between large firms and legislators.

Others, however, maintain that tax benefits for oil firms are justified since oil is a critical commodity consumed by a significant proportion of Americans. The price of oil is a critical component of the US economy. Oil industry representatives also contend that eliminating tax incentives and subsidies would be expensive due to diminished oil investments in the private sector and fewer employment in the industry.

Finally, some believe that tax laws are intended to assist and preserve the survival of the vast majority of small oil and gas companies rather than huge enterprises. It is akin to the federal government’s agricultural subsidy rules, which enable some products to be sold at low prices and are intended to guarantee farmers are adequately paid.

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