ANNOUNCEMENT 02 May 2009In May 2009, the government of the United States of America announced a change in the tax legislation for exporters.
NUMBER OF INTERVENTIONS
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A subsidy program that was intended to promote alternative fuels has been used by U.S. paper manufacturers to receive substantial payments from the U.S. Treasury for a practice that the industry employed decades before the program was established. The subsidy in question formally expired at the end of calendar year 2009, but in mid-2010 the industry won a ruling from the Internal Revenue Service that allows it to receive a similar subsidy under a different law.
The original, underlying statute under which the credit was claimed was a transportation law entitled the 'Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users' or SAFETEA-LU that was enacted into law in 2005 (Public Law 109-59). That law provided various incentives for the use of alternative fuels in transportation, including payments to industrial users. Congress then amended SAFETEA-LU in 2007 by enacting the 'Energy Independence and Security Act of 2007' (Public Law 110-140), one section of which provided that the credits could be extended to non-mobile uses of liquid alternative fuel derived from biomass. While the intent behind this statute was to encourage new uses for alternative energy, the statute was written in such a way as to allow firms to claim credits for existing uses as well. It was not until late 2008 that tax specialists saw the potential benefits for the paper industry and its use of black liquor.
Black liquor is a by-product of one of the processes used by pulp mills in the production of kraft paper pulp. It is a solution of lignin residues, hemicellulose, and inorganic chemicals that contains more than half of the energy content of the wood fed into the digester. This used to be a pollutant that was discharged into rivers, but since the invention of the recovery boiler in the early 1930s it has been a common practice for mills to use the black liquor as an energy source. The low-grade fuel is burned to recover energy in the form of steam, with the steam either used elsewhere in the mill or sent to a steam turbine to produce electricity. According to the Center for Paper Business and Industry Studies, approximately 240 million tons of black liquor are produced each year in pulp production world wide, with a fuel value equivalent to about 460 million barrels of crude oil.
The paper industry began claiming the credits for its use of black liquor in the fourth quarter of 2008. The Washington Post reported (May 2, 2009) that it was the accounting firm of Pricewaterhouse Coopers that developed the idea of claiming credits for black liquor under this law. Verso Paper received a tax credit worth $29.7 million in 4Q2008 for using black liquor at just one of its four mills. According to another Washington Post story (March 27, 2009), 'The Treasury's payment to Verso was only $7 million less than the company's current market capitalization.' The Post also reported that analyses by investment firms variously estimated the benefits for International Paper in 2009 as $1.06 billion or $3.7 billion. International Paper's own report on first quarter, 2009 earnings imply that the net $330 million'1' that it received for these credits was enough to make the difference between a profit and a loss on this company's global operations; net earnings that quarter were 61˘ per share, but this would have been a loss of 17˘ per share without fuel credits worth 78˘ per share. Many other U.S. paper companies are also taking advantage of the program. One press account estimated that the total claims in 2009 could reach $6.6 billion.
News reports on the use of this credit led some members of Congress to consider corrective legislation, such as Representative Ann Kirkpatrick's (Democrat of Arizona) bill (H.R.2967) that would deny this credit, but no action was taken on that bill before the subsidy expired on December 31, 2009. In just over half a year, however, the industry found a new way to continue these benefits. A ruling issued by the Internal Revenue Service on June 28, 2010 allows black liquor to qualify for another tax credit, in this case one meant to encourage new cellulosic biofuels for transportation. "At Weyerhaeuser alone," according to a Washington Post story on the issue, "the new use of the cellulosic biofuel credit added $149 million to the company's 2010 profits."
The New York Times reported (June 17, 2009) that the Government of Canada would retaliate for this measure by providing subsidies of its own to Canadian pulp and paper mills. This could consist of 16 Canadian cents for each liter of black liquor that they burn to provide steam and power for their plants.
'1' The report stated that the company 'has submitted refund claims totaling $558 million ($330 million after associated expenses and taxes) for the period of Nov. 14, 2008, through March 31, 2009, based on actual production at its 20 integrated U.S. mills.'