Tax Policy

Investment Tax Credit for Offshore Drilling Rigs Needs Clarification Gao ID: GGD-86-65 April 10, 1986

GAO presented: (1) information on the history of investment tax credit and the applicable exceptions for offshore drilling rigs; (2) the basis on which the Internal Revenue Service (IRS) allows the credit for such rigs; and (3) estimates of the dollar amounts of credit that have been available for offshore drilling rigs placed after 1975 and used outside the designated portion of the Western Hemisphere.

The tax investment credit was created to provide an additional incentive for expansion and modernization of capital investment to: (1) improve the U.S. competitive position abroad; and (2) aid in meeting the nation's balance of payments. The tax credit allows taxpayers reductions in their federal income tax liability in a dollar-for-dollar amount of the credit taken and is determined by multiplying the cost of the property and a specified percentage. Both domestic- and foreign-built equipment are eligible for the tax credit if used in the United States, but property used outside the United States is not eligible unless a specific foreign-use exception applies. One foreign-use exception allows the credit for offshore drilling rigs used in the Outer Continental Shelf. However, a restriction to the exception was added to limit it to property used in the northern portion of the Western Hemisphere. Notwithstanding the restriction, IRS continues to permit offshore drilling rigs operating outside the area to qualify for the tax credit under the foreign exception. GAO estimated that about $375 million of tax credit was available on 94 new rigs placed since 1975. In addition, 16 other offshore rigs worth an estimated $90 million to $112 million in tax credit are under contract for construction, most outside the Western Hemisphere. GAO believes that, unless Congress clarifies the law, additional revenues may be lost.

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