Opening Statement/Submission Senate Inquiry into Corporate Tax Avoidance
The Tax Justice Network – Australia (referred to as TJN) was impressed with quality of analysis in the Callaghan Review, but seriously disappointed in its recommendations to not make any substantive and necessary reforms to existing projects. The Review backed up the analysis put forward by TJN, but completely capitulated to the trumped-up claims of sovereign risk put forward by the industry. The PRRT has been changed at least 9 times already, each time to the benefit of the industry, and no concerns of sovereign risk were raised before. There is plenty of hypocrisy in play here to preserve an incredibly beneficial fiscal regime for the oil and gas industry and one that very clearly deprives Australians of a fair share of revenue.
In a complete contradiction, the government’s proposal to introduce a levy on the largest domestic banks, who already pay significantly more corporate tax, did not raise any concerns of sovereign risk. Rather than make policy changes to fix a tax regime which is clearly broken and in a sector that is dominated by foreign multinationals with a proven record of corporate tax avoidance, the government choose to score cheap political points with a populist play by taking a whack at the banks.
TJN supports a bank levy that does not create a competitive disadvantage for domestic banks, but strongly believes that foreign multinationals should not be getting our gas for free. The revenue from the bank levy is relatively low in comparison to what is at stake in Australia’s booming offshore LNG industry.
The five largest offshore gas projects in Australian waters are 87 per cent foreign owned. The Government has favoured foreign shareholders in offshore gas projects over mum and dad investors in Australian banks. This is a national disgrace and a betrayal of Australia’s national interest.
The Callaghan Review
The Review exposed flawed elements of the PRRT that we were not even aware of. Companies are not required to file on PRRT with ATO until after production starts. This means that on top of the $238 billion in PRRT credits that we knew about there are potentially hundreds of billions in additional exploration credits that have yet to reported. These credits are transferable and entitled to an 18% uplift that compounds annually. Additionally, the Review makes it clear that these credits are not required to be used first. Companies can hang on to them and nearly double the value over 4 years.
A key flaw of the review was the lack of reliable data used and the fact that Treasury allowed the companies to present data in a way that made it appear they would pay more PRRT over the life of the projects. The idea that these multinational oil companies will voluntarily structure their tax credits to make more tax payments and not less is patently absurd. The data was obtained from Wood MacKenzie because the government itself does not have data. There are obvious biases of Wood MacKenzie as a contractor for APPEA and the industry as whole.
This lack of data on resources that belong to the Australian people is appalling and a detriment to informed public policy decision making. Any public disclosure is prevented due to concerns for the confidentiality and privacy of multinational corporations. It appears that corporate interests are more protected than the public interest.
The domestic companies in this space, BHP Billiton and Woodside, are relatively transparent about their payments to governments and production levels. The foreign multinationals, particularly Chevron and Exxon, have fought against disclosure, but have been forced to comply in jurisdictions that have required reporting on payments to government such as Canada, the United Kingdom and the European Union.
Tax Payments by Domestic Banks and Resource Companies
It is also worth noting the BHP Billiton and Woodside are significant taxpayers in Australia. The TJN report on ASX 200 companies from 2014 looked at the effective tax rate of companies over a decade. In that study, the only one of its kind, Woodside’s estimated effective tax rate was 30% and BHP Billiton’s was 27%. Both BHP Billiton and Woodside are consistently among Australia’s top taxpayers.
As was reported in The Australian newspaper on July 29: Former Labor prime minister Paul Keating has lashed out at “a lot of bludger international companies in Australia” that escape paying full local taxes because they base their corporate headquarters in tax havens offshore.
Mr Keating praised BHP as one of the exceptions that paid its tax, including franked dividends that ensured shareholders received some of the profit returns.
It is also worth noting that Australia’s top taxpayers in the most recent year of ATO data are Commonwealth Bank, Westpac, Rio Tinto, NAB, ANZ and BHP Billiton. These 6 companies made over 36% of the total tax payments disclosed in the ATO data.
In the TJN ASX 200 report, the effective tax rate for the banks over the decade was 27% for Commonwealth, 28% for Westpac, and 27% for both NAB and ANZ. When the report was released there was significant engagement and dialogue with several banks to understand our analysis and confirm our understanding of their tax payments and practices. They cared about their reputation.
In stark contrast to this Chevron and Exxon, despite making huge revenues from the Northwest Shelf and Bass Strait have paid zero in corporate tax in the last two years. By Chevron’s own calculations its effective tax rate has been zero in every year over the last six years, except climbing to 7% and 8% in two years.
Shell was a significant corporate taxpayer in 2014/15, but that is likely from its retail business, which has now been sold. Like Chevron and Exxon, Shell and BP have been involved in aggressive tax minimisation practices in Australia and around the world.
While the ATO has made significant progress in addressing tax avoidance in the offshore oil and gas sector, including the federal court case against Chevron and the new guidelines on offshore related party debt, there is still a long way to go. The government’s failure to address the very clear flaws in the PRRT system is an embarrassing policy failure. The hypocrisy of introducing a bank levy on domestic banks, the largest taxpayers who employ tens of thousands of workers in Australia, while failing to make modest changes to actually collect minimum payments from multinational oil giants is astounding.
TJN looks forward to the release of Treasury’s in-depth modelling and investigation into the design and efficacy of the bank levy. If this doesn’t exist, it really does appear the Turnbull Government is crab-walking away from a fight with the oil and gas industry that would very much be in the national interest, instead taking the easy option of bank-bashing. The government’s failure to propose meaningful reform to the tax regime on offshore gas is a direct threat to adequate funding for schools, hospitals, and other services that Australians rely on and that are the foundation of our quality of life, future economic growth and a fair society.
The Current Situation: Free Gas for Multinationals
At today’s oil prices, or at any price below $60/ barrel, the Callaghan review confirms that no PRRT payments are likely to ever be made over the entire 40-year project life from any of the 5 new offshore LNG projects that are catapulting Australia into the position of the world’s largest exporter. As the pace of renewable energy production continues to surpass expectations, there is an increasing possibility that oil prices will remain low indefinitely.
Nonetheless, TJN estimates that the value of production from these 5 projects at $60/barrel is $33 billion per year. That is $33 billion in sales per year for 40 years for which the Australian people may not receive any direct payment. That is over $1.3 trillion in revenue for the world’s largest oil companies and no direct payment to the Australian people. That is not a fair return.
Woodside is the only domestic player involved in these 5 offshore projects. Eighty-seven percent of the production of these 5 projects is owned by foreign multinationals. The Reserve Bank of Australia has stated that the economic benefit to Australia of the LNG boom will be limited due to the high levels of foreign ownership, low levels of employment once production starts, and the massive amount of tax deductions and credits.
At the last hearing you heard some outrageous projections of PRRT payments from Chevron, beginning after 2030. Those numbers are absolutely absurd, based on ridiculous assumptions, and are completely out of line with the estimates from Wood McKenzie. Unfortunately, it seems that Chevron, Exxon and the other multinationals have cajoled the government of day, once again, into believing that the PRRT system, which they have successfully shaped to their favour, is going to magically deliver revenue in the future. The odds of that are slim. Don’t take those promises to the bank…
Proposed Solutions
We believe that there are four simple measures needed to restore integrity and public confidence to the tax regime for offshore gas and guarantee that the Australian community gets a fair share.
First, to guarantee that Australians receive some benefit, a minimum price, for our resources a 10% royalty needs to apply to offshore gas that is currently only covered by PRRT. The royalty is necessary given the possibility of oil prices remaining below $60 per barrel and the PRRT failing to collect any revenue ever. The royalty would level the playing field for all oil and gas projects, such as the North West Shelf and the Queensland CSG to LNG, that already pay a 10% royalty.
Modelling by the McKell Institute suggests annual revenues of $2.8 billion for a 10% royalty on the five offshore LNG projects. It is important to note that the royalty does not fundamentally change the economics, or projected returns to the companies, over the long lifespan of these projects. The royalty merely brings payments forward and guarantees that some modest revenue is collected.
The distinct possibility that Australia, as it becomes the world’s largest exporter of LNG, may never collect any direct payments from its natural resources was never intended and is truly a global embarrassment that needs to be addressed immediately.
The modelling of the 10% royalty proposal by the Callaghan Review suggested that the royalty would collect less revenue over the life of the projects than the PRRT in its current form. Obviously, this is dependent on higher oil prices but also because royalty payments are deductible from PRRT and granted a 5% uplift which compounds annually. Royalty payments should be deductible from PRRT, but not given any uplift.
Secondly, the method to measure the value at which the PRRT applies, the gas transfer price mechanism, needs to be simplified and made more transparent. Here is an opportunity for the government to cut red tape. The PRRT regulations currently allow for multiple methods to determine the value of gas to which the PRRT is applied. There is ample opportunity for transfer pricing to reduce tax payments and the companies involved have a long and documented history of transfer pricing in relation to corporate income tax payments.
The PRRT Review modelled the difference between using the current default method of determining value, the Residual Price Mechanism, and the net-back method.
By making the net-back method the standard for determining value there would be an extra $89 billion in PRRT revenue over the life of the project. Regulatory changes are needed to simplify and update the way the value of gas is determined. This is a reasonable and common-sense regulatory reform.
Thirdly, the overly generous uplift rates need to be scaled back on all PRRT credits moving forward and it must be a requirement that existing credits with uplifts of the LTBR +15% be used first. Again this is a reasonable and common sense reform. No other industry is entitled to uplifts like this.
Finally, there must be mandatory public disclosure of production levels by project and estimates of known reserves. Some of this data is available from various sources, particularly disclosure by listed companies. However, this data is not easily accessible or comparable. This reform is in line with emerging globally standards for transparency in the resource sector. Australia is far behind in this area and its ability to join the global Extractive Industries Transparency Initiative (EITI) process is jeopardised by the lack of existing public disclosure.
In conclusion, these are simple, reasonable, common sense reform proposals that will not have any impact on future investment decisions, despite the threats from companies who reap unparalleled benefit from the existing system. If these reforms are not enacted, it will further undermine public confidence in the integrity of the PRRT system. Ultimately, it would be better for the industry to accept these modest reforms now and secure a stable fiscal regime for the oil and gas industry into the future. Without change the demands for reform from the public will only continue and increase the risk of more significant changes in the future. We hope that the government and the opposition will take responsible measures to protect the interests of the Australian people.
Thank you for the opportunity to testify today.