The Fifth Circuit of the US court on August 3rd denied ExxonMobil’s bid for a US$1 billion tax refund for its oil-and-gas agreements with Qatar and Malaysia.
According to Law360, the court found that the agreements count as leases and not sales since both countries maintained an interest in the extracted fuels.
Exxon cannot claim the refund for 2006 through 2009 because the deals it entered into with Qatar and Malaysia are better defined as leases rather than sales, the appeals court said in a published opinion, according to Law360. According to the opinion, both countries maintain some form of economic interest in the extracted minerals through various payment schemes, including ones that depend on the amount of gas delivered to Exxon’s facilities in Qatar and the quantity of gas extracted from Malaysia.
According to Law360, the Fifth Circuit also rejected Exxon’s efforts to recover US$300 million by taking a cost-of-goods sold deduction on its full liability for gasoline excise taxes before it was reduced by tax credits it received for producing renewable fuel blends. However, the 5th Circuit affirmed a lower court’s ruling that found that Exxon wasn’t liable for a US$200 million penalty for claiming an unreasonable refund, saying that whether a transaction counts as a lease or a sale is a “notoriously complex area of tax law.”
Law360 said that Exxon’s suit seeking a refund of around US$1.5 billion in taxes and penalties largely centred on the transactions it conducted with Qatar and a Malaysian company, Petronas, and whether they fall under the more advantageous category of mineral sales for tax purposes.
Exxon secured the right to extract and export in Qatar’s North Field through development and fiscal agreements the country entered into in the 1990s and 2000s, according to court filings.
Under those agreements, Law360 said that Exxon was required to build facilities to convert the North Field gas into a liquid. It was also to market the liquid natural gas in other countries and to make certain payments to Qatar for the value of the gas and other products.
At the end of those agreements, infrastructure that Exxon built became Qatar’s property, Law360 said. Exxon’s Malaysia subsidiary also struck similar agreements with Petronas for offshore oil and gas deposit development, under which it had to build infrastructure that would eventually belong to Malaysia in return for certain oil and gas rights, according to court filings accessed by Law360.
Exxon was also required to make payments to Petronas, including for the value added to oil and gas by certain activities such as transportation and processing. But it lodged amended tax returns to recategorize those transactions as sales, and also varied its calculation of cost of goods sold for those tax years so that it was not reduced by the amount of excise tax credit it received, according to the opinion.
The US Internal Revenue Service, however, disagreed with the treatment of those transactions on the amended tax returns and disallowed the company’s refund claim. Exxon filed its suit against the federal government to recover the taxes in 2016, and a Texas federal court ultimately found that the company had to treat the Qatari and Malaysian transactions as mineral leases and not sales.
Law360 reported that the energy company told the Fifth Circuit that it was required to create infrastructure that would eventually belong to Qatar and Petronas, and the company was obliged to pay both companies based on the value added to those raw minerals. These factors and others indicate the deals were more like sales than leases, Exxon had argued.
But the Fifth Circuit on August 3rd sided with the government on the mineral lease or sale question, determining that Exxon’s categorizing of the deals as leases on its original returns was the correct tax treatment. It also agreed with other courts that have considered the cost of goods issue, pointing out that various energy companies have unsuccessfully attempted to increase the deduction from income by the excise tax credits they received under Internal Revenue Code .
Specifically, the court ruled that credits reduce the actual tax liability. They don’t merely pay off the liability as Exxon has contended, which could enable it to skip reducing its cost of goods sold deduction by the credits it received, according to the court.
“Its gambit is the latest installment in a series of nearly identical claims that companies have filed nationwide,” the opinion said. “We join the unanimous chorus — judges who comprise two courts of appeals and three district courts (9-0 for those keeping score) — to hold that Exxon’s credit reduced its excise-tax liability such that it can only deduct the excise tax it paid out of pocket”, the court added.
A spokesperson for Exxon told Law360 that the company is “reviewing the ruling and evaluating next steps.”
The U.S. Department of Justice did not respond to a request by Law360 for comment.
U.S. Circuit Judges Gregg Costa, Edith Brown Clement and James E. Graves Jr. sat on the panel for the Fifth Circuit.
Exxon was represented by Kannon K. Shanmugam, Matteo Godi, Adam Savitt and Brian M. Lipshutz of Paul Weiss Rifkind Wharton & Garrison LLP and by Emily A. Parker of Holland & Knight LLP.
The U.S. government was represented by Clint A. Carpenter, Jonathan L. Blacker, Judith A. Hagley and Cory A. Johnson of the U.S. Department of Justice, Tax Division.
The case is ExxonMobil Corp. v. U.S., case number 21-10373, in the U.S. Court of Appeals for the Fifth Circuit.
While this Exxon case has no specific bearing on the company’s relationship with Guyana it will pique interest here for various reasons. Through its 2016 Production Sharing Agreement (PSA) Exxon pays no tax to Guyana despite what is seen as a deal heavily skewed in its favour. The PSA requires the Guyana Government to pay Exxon’s tax liability. Exxon then secures a certificate of tax compliance from the tax agency here which it could then present to the US IRS as evidence of its payment of taxes. Observers have argued that this is highly irregular. The case is also interesting as it shows the lengths to which Exxon is prepared to go to recover tax payments it believes were not appropriate.
