Offshore profits and the issue of tax havens
Some North Sea oil and gas operators, including China’s CNOOC and Chevron UK, have been accused of using offshore tax havens to protect their profits from the British Treasury. Chevron has denied the findings of a report by the ITF union alleging the company had $32bn in offshore accounts, while Oil & Gas UK CEO Deirdre Michie has responded saying that the industry is “a major tax contributor to the UK” even in a low oil price environment. Does the industry need to change its financial arrangements, or are the allegations unfair?
Working out the rates at which the profits of strategic resource industries such as offshore oil and gas should be taxed is something that national governments have been considering for decades, with policymakers and fiscal authorities balancing the need for countries to see meaningful tax revenues from their extractive industries and the rival need for regional oil and gas markets to be seen as investment-friendly destinations that are open for business.
Nevertheless, in light of recent scandals and as many countries continue to feel the sting of austerity, there is today arguably a sharper spotlight than ever before on the tax paid (or avoided) by multinational corporations. These concerns are in no way limited to the oil & gas sector; as the leaked revelations from the so-called Panama Papers in April make clear, tax havens and shell entities are rife in virtually all business sectors. While these tax-efficient mechanisms are mostly legal and many beyond reproach, ethical concerns over the fairness of large-scale corporate tax avoidance have escalated.
The International Monetary Fund found in July 2015 that profit-shifting by major companies deprives developing countries of approximately $213bn a year, and Oxfam America president Raymond C. Offenheiser in January described tax havens as being “at the core of a global system that allows large corporations and wealthy individuals to avoid paying their fair share, depriving governments, rich and poor, of the resources they need to provide vital public services and tackle rising inequality”.
In October last year, the Australian Tax Office (ATO) won a landmark case against Chevron, which charged the supermajor of using a US subsidiary in the low-tax state of Delaware to channel profits through loans and inter-company payments, which the Federal Court deemed in contravention of transfer pricing rules. According to the ATO, the company used the series of loans and related-party payments to cut its tax bill by up to $258m, and the court ruling has ordered the company to pay the full amount plus penalties, which could bring Chevron’s total fine to more than $300m.
“The tentacles of multinational corporations like Chevron must pay tax wherever they unfurl,” said Australian Labor Senator Sam Dastyari in the wake of the ruling.
Tax revenues in decline in the UK North Sea
In the UK, the tax arrangements of some operators on the UK Continental Shelf (UKCS) have come under scrutiny for similar reasons. Consistent lobbying from the oil and gas industry has resulted in significant tax breaks to help offset declining profitability as a result of depressed oil prices since 2014.
In the 2016 Budget, erstwhile UK Chancellor George Osborne unveiled a raft of tax cuts for North Sea producers, including a reduction in the overall corporate tax rate to 30%, the elimination of the Petroleum Revenue Tax and the halving of the supplementary charge for oil companies.
These tax breaks, combined with declining profits due to the oil price slump, have led to one of the UK’s lowest-ever North Sea net tax receipts of just £35m for the last financial year, compared to around £2bn paid in 2014-15. Although £538m was paid in combined corporation tax on offshore production, these revenues were nearly cancelled out by £503m in Petroleum Revenue Tax rebates. It’s not a blip, either – according to the UK Office for Budget Responsibility, tax revenue from the UKCS is set to continuing falling for at least the next few years.
“More than £330bn in 2014 money has been paid to date on UK oil and gas production, however, HM Treasury has noted that tax take on production will fall in 2015-16 and fall further by 2021,” industry association Oil & Gas UK’s economics director Mike Tholen told the BBC in April.
ITF report levels tax haven accusations at Chevron UK
Given the increasing generosity of the British Treasury and its tax arrangements with UKCS operators, reports of aggressive tax minimisation efforts from the industry itself have caused understandable consternation.
China’s CNOOC, the largest producer in the UK North Sea with an 11% share of total production after its 2012 acquisition of Canadian oil company Nexen, has received some scrutiny from critics for running Nexen partly through offshore tax havens such as the British Virgin Islands. Meanwhile the company’s own annual report for 2015 warned that action from the Organisation for Economic Co-operation and Development to clamp down on corporate tax avoidance could, as experienced by Chevron in Australia, “cause risks to the company on global transfer pricing activities”.
But it is Chevron, again, that has borne the brunt of criticism after a report published in August by the International Transport Workers’ Federation (ITF) accused the company of setting up “secretive corporate structures” to cut down its tax bill in the UK, along with other oil majors such as BP and Shell.
“The public would be shocked to see how Chevron uses a complex web of companies to route money through the Netherlands, Bermuda and other tax havens. It has over 200 active subsidiaries in Bermuda alone,” said ITF general secretary Steve Cotton after the report was published. “It is well documented that both Shell and BP are using similar corporate structures to reduce their tax in the UK. Both BP and Shell in 2014 paid no UK corporate tax.”
As well as criticising the lack of transparency around Chevron’s debts and credits with the British exchequer, the ITF report highlighted the complex mechanisms by which the company may be avoiding UK tax obligations, alleging that Chevron has $32bn in offshore accounts and hundreds of offshore subsidiaries.
“Chevron’s UK operations connect to a complex web of subsidiaries in the Netherlands, Bermuda, Delaware and elsewhere,” the report notes. “After any tax payments are paid – or not – on oil and gas production in the UK, the remaining profits are transferred by tax-free dividends until they reach Chevron subsidiaries in Delaware with no public reporting of accounts.
“At the core of Chevron’s UK operation is the ‘cash pooling’ function of Chevron Treasury BV [CTBV] in the Netherlands. CTBV ‘is engaged in the efficient utilizations of cash by managing cash pooling for a number of Chevron companies’. CTBV has loans back and forth with multiple UK subsidiaries and also shuffles cash back and forth with at least two Chevron subsidiaries in Bermuda.”
The industry responds
In response to the ethical concerns raised about the tax schemes of oil companies in the UK, Oil & Gas UK has been quick to defend its members. The association’s chief executive Deirdre Michie has argued that governmental tax relief measures reflect the oil price downturn, which, far from the ITF’s vision of an industry reaping millions in untaxed profits, has left nearly half of UKCS producers operating at a loss.
While Michie has not fully addressed criticism of the industry’s tax minimisation methods and use of tax havens, she emphasised the ‘ring fence’ around production profits that stops them from being diverted overseas. “This guarantees all oil and gas companies operating in the UK pay the full tax due to HMRC and ensures losses from a company’s other activities (including from overseas operations) are not used to reduce a company’s UK production tax bill,” Michie said in a statement published by Energy Voice.
Chevron, meanwhile, has responded to the ITF’s report by echoing a common argument made by companies accused of aggressive tax avoidance: “Chevron North Sea Ltd fully complies with all tax laws relating to its North Sea UK interests and the allegations made by the International Transport Workers’ Federation are incorrect,” the company said in a statement that also trumpeted Chevron’s £3.5bn contribution to the UK exchequer over the last decade.
Chevron’s compliance with UK tax laws and the ITF’s allegations of its excessive tax avoidance measures, including the use of offshore tax havens, are not necessarily mutually exclusive, and that leaves the ball in the government’s court. Oil companies, especially those working through an historic oil price depression, are likely to use whatever means available to reduce the tax due on their profits. The free market isn’t going to self-correct in this area, which means UK policymakers will have to balance the pursuit of offshore tax loopholes with the global competitiveness of its oil sector, just as it does when considering tax relief measures. In the absence of international consensus on the need to tackle tax havens – which seems far-off at this point – this is the balancing act that is being performed by all oil-producing countries.