Shell and corporate tax
I should thank the Forum on Tax Administration for your invitation for me to speak today – and for your valuable work in building bridges between tax administrations and taxpayers at a time of uncertainty for us all. Today, I’ll explain why we, at Shell, welcome closer relationships with the tax authorities and I’ll make a few suggestions about how to smooth the path of co-operation.
Shell and taxation
But you first asked me to place the issue of tax in its broader context, and to provide a brief overview of our current business conditions and challenges.
It’s now clear that the world has entered a prolonged era of macro-economic volatility.
In 2012, the big story is again the Eurozone debt crisis: the Eurozone may now have slipped back into recession and Europe’s banking system remains extremely fragile. Elsewhere, the recovery in the US remains sluggish, despite tentative signs of improvement in the labour market. And a number of important emerging markets face flagging growth and high inflation.
That’s not all. 2012 has already highlighted that geo-political risks also cloud the horizon with the tension surrounding Iran pushing up oil prices. This is also a reminder that high and volatile energy prices will be with us for the foreseeable future as long-term demand for energy surges and supplies come under pressure.
On top of all this, businesses must adapt to a wave of new financial regulation. This year in the US, for example, many of the Dodd-Frank Act’s provisions are likely to come into effect across a wide range of areas from consumer finance to over-the-counter derivatives. Meanwhile, the EU is working on its own regulatory overhaul.
So what does this mean from my point of view, as the CFO of an energy company like Shell?
It means maintaining a sound balance sheet appropriate to an era of macro-economic volatility - while investing billions of dollars in developing new energy sources. It means managing risk across all areas of business activity -- from complying with financial regulations to the safety risks associated with producing oil and gas in challenging locations, such as the deep waters of the Gulf of Mexico. And it means adapting Shell’s businesses to leaner times, while laying the foundations for future growth -- sometimes in unfamiliar growth markets and in new areas of business activity, such as biofuels.
Against this backdrop, predictable and transparent tax regimes can be a welcome source of stability – especially so in the energy industry where our investment lifecycles span decades.
But there’s another, broader reason why tax is currently such an important issue for Shell. The global economic crisis is forcing a re-evaluation of more than just the financial services sector.
There’s a sense that capitalism itself has reached a turning point and that something is broken in the contract between government, society and business.
You can see that in everything from the surge in financial regulation in Washington to the “Occupy Wall Street” protests. As part of this, there’s a highly charged debate about whether international companies like Shell avoid paying our fair share of tax.
Now, there’s no doubt that the business sector must strive to preserve and strengthen public confidence in its activities. But the debate on tax can all too easily be coloured by misunderstanding.
At a basic level, it’s the responsibility of policymakers to determine what a fair share of tax is. And it’s our responsibility as businesses to pay these taxes and to uphold the law.
But in the energy industry, determining what a “fair” tax rate might be is a difficult balancing act, and one that must take account of the level of investment and risk involved in developing an oil or gas field.
For example, a high tax rate might be appropriate in a Middle Eastern country holding substantial and easily accessible resources. But it’s a different story in, say, the North Sea, where oil and gas fields are smaller, more technically challenging, and less profitable for companies to develop. A very high tax rate there might simply make these resources commercially unviable to produce.
The same is true of the debate about “tax havens”. Here again, it’s for sovereign nations to determine their own tax rates in accordance with the revenues they want to generate. And businesses like Shell are perfectly entitled to operate in low-tax jurisdictions for legitimate business purposes.
What we must do is to co-operate with the authorities and other businesses to help stamp out illegal activity in these countries. And the OECD has been doing much good work to encourage this kind of co-operation and exchange of information.
These are some of the points that are often lost in the public and political controversy about tax. And I believe that you, the tax authorities, can help to inject a note of reason and moderation here.
The reality is that we, at Shell, have every incentive to pay our fair share of tax and to be transparent about doing so. There is, quite simply, no better way to highlight our industry’s role as a powerful engine of government revenues, employment and growth. And thus to remind people that profitable and well-run businesses are essential to healthy societies.
The energy industry and its broader economic contribution
In 2010 Shell paid more than $15 billion in corporate taxes and we collected more than $80 billion in excise duties and sales taxes on our fuel and other products on behalf of governments. And that does not include the royalties, payroll, property and other taxes that we pay.
There’s also a story about the developing economies. In Nigeria, for example, the Shell Petroleum Development Company of Nigeria is the operator of a joint venture between the government-owned Nigerian National Petroleum Corporation, Shell, Total and Agip. Between 2006 and 2010, the joint venture paid the Nigerian government revenues totalling some $31 billion. And the Nigerian government receives 95% of the revenue after costs from each barrel of oil it produces.
But the energy industry’s economic contribution extends far beyond its own payment of taxes. At Shell, we invested nearly $30 billion in developing and delivering new energy supplies in 2011. We also spent an estimated $62 billion with third party suppliers around the world last year. All of which is a powerful driver of prosperity and employment in countries across the world.
Efficient and straightforward tax regimes: supporting investment
When you consider the scale of this contribution, you can see why we, at Shell, are happy to be transparent about the amount of tax we pay.
You can also see why predictable tax regimes that incentivise investment are so important, not just to the energy industry, but to society as a whole. Just now, they matter more than ever: enormous deficits are prompting some governments to pursue a more short-term and volatile approach to tax.
But another critical element of these regimes is how the authorities apply the law, and whether they do so in an efficient, consistent and predictable manner. All of which explains Shell’s commitment to closer co-operation with the authorities.
I’m talking about co-operation that follows the FTA’s guidelines: we provide the authorities with timely and comprehensive information on potential tax issues -- in return for treatment that is impartial, proportionate, open, responsive and grounded in an understanding of our commercial environment. Thus we are able to settle tax issues upfront, giving us, the business, the certainty we need to begin arranging financing and other corporate and operational structures.
From our point of view, such relationships offer the best chance of efficient and predictable tax regimes for our investments. And they help us to comply with the law, and to manage our tax-related risks – which are just one set of the risks that we face in our day-to-day activities.
A word on what we don’t expect from closer co-operation: we don’t expect to get everything our own way or to enter into “sweetheart deals”, in other words deals that allow us to avoid complying with the tax laws of the countries in which we operate.
For the tax authorities, closer co-operation offers the most efficient route to raising revenues. In particular, it reduces the need for lengthy and expensive audits, so that you are free to focus on your most important risks and the real miscreants engaged in tax evasion and fraud.
Building co-operative relationships
All this has certainly been the story of Shell’s relationships with the Dutch and UK tax authorities over the past five years.
At the outset, I was surprised by the degree of mutual misunderstanding. But we have long since moved beyond this to build strong and co-operative relationships. And we’re now taking this a stage further with a tri-partite - or “three-way” – relationship to resolve cross-border tax issues affecting taxpayers operating in the two countries. This has already brought important benefits. For example, in 2009, we moved some of our gas trading and marketing operations to the UK from the Netherlands. And we resolved the associated cross-border tax issues within months, avoiding a costly audit.
And it’s great to see more tax authorities appreciating the benefits of closer co-operation. At Shell we were delighted to accept Austria’s invitation to participate in its new pilot scheme.
So what are some of the critical steps to effective co-operation?
First, there should be genuine commitment to the relationship from both sides. That has to come from the top: from us, as CFOs, and from you, as tax commissioners.
A second step must be the development of mutual trust, underpinned by rigorous controls and audit procedures. At Shell, this is provided by our tax control framework. This in turn is just one part of our wider business control framework, which manages and mitigates risk across all areas of business activity.
That includes the safety and environmental risks we face in locations like the Russian sub-Arctic. Under the framework, we regularly test our tax controls, which are also audited by our external auditors. And as part of our enhanced relationships, we are happy to share our internal results with tax authorities, even if they did not show us in a flattering light.
The third, and most obvious, requirement is that the co-operation should be mutually beneficial and reduce costs for both sides: so businesses should be demonstrably transparent, while tax authorities should resolve tax issues more swiftly.
Let me sum up. Businesses and governments are in an era of strong volatility –- one in which stable and predictable tax frameworks are critical to maintaining the right conditions for much-needed business investment.
This is especially true in the energy industry, which - while profitable - already makes an enormous contribution to tax revenues, employment and prosperity around the world.
If companies and the tax authorities can work together in a spirit of trust, transparency and mutual understanding then all parties will benefit. Businesses will enjoy stronger conditions for investment, and government exchequers will receive their revenues more quickly and cheaply. And that is surely a prize worth striving for.