How tax havens support fossil fuel companies

We’ve been reading an excellent new Reuters report entitled How oil majors shift billions in profits to island tax havens. As it summarises:

“Shell and other oil majors are avoiding hundreds of millions of dollars in taxes in countries where they drill by shifting profits to thinly staffed insurance and finance affiliates based in tax havens, according to a Reuters review of corporate filings and rating agency reports. Shell, BP Plc, Chevron and Total use subsidiaries in the Bahamas, Switzerland, Bermuda, the UK Channel Islands and Ireland.”

Companies claim they do not “engage in artificial tax arrangements.”

One of the most interesting aspects of this report concerns “captive insurance”, which are subsidiaries of the fossil fuel companies, parked in tax havens: their core role seems to be more about escaping tax, than about insuring things. The Reuters story contains an excellent short explainer about how captive insurance works.

Normally, an insurance company hopes to take in more in insurance premiums (which are income) than it has to pay out in insurance claims (which are costs), and if income is greater than cost then it makes a profit.

Captive insurance throws a well-aimed tax haven spanner into this, as the story notes:

“The big oil firms’ captive insurers are far more profitable than a typical insurance company. That’s because the amount they pay in claims accounts for a far lower proportion of the money collected in premiums – all from other affiliates of the oil giants – than is the case at other insurers, Industry data shows. That means the captive insurance units absorb part of the revenue made by the oil majors’ subsidiaries elsewhere – often in high-tax countries where they extract oil and gas – and shift it to operations located in low-tax or no-tax jurisdictions.”

For tax justice connoisseurs, it’s another form of transfer pricing to shift profits into tax havens. But what is astonishing is how brazen this all is. Here’s an example from BP:

“In 2014, Jupiter had an operating ratio – which includes pay-outs and other costs as a share of premiums – of just 1.3%. That compares to more than 90% for most U.S. insurers.”

That is a shocking comparison. All of this boosts fossil-fuel profits, increases inequality, undermines tax systems and faith in democracy. Captive insurance companies also pose financial stability risks (e.g. see p20 here). That’s because tax havens don’t just help big multinationals escape tax: they are generally libertarian zones of regulatory laxity where things like capital and reserve requirements fall away, there is little or no transparency, and little or no direct supervision. (In fact, your correspondent spoke to a senior insurance company official a few years ago who said their giant global company came close to collapsing during the last global financial crisis, largely because of huge risks that had piled up in an offshore subsidiary.)

How do we tackle this? Well, in two main ways.

First, completely re-engineer the international tax system, along lines we have long endorsed, such as country by country reporting, or unitary taxation with formula apportionment. Fortunately, this is now starting to happen. If done properly, these moves could cut captive insurance and many other shenanigans right out of the global tax system, and raise hundreds of billions in tax.

Second, join our two-day online conference to discuss how to pay for the climate transition. It starts in a couple of hours! It is free to all and you can register here to attend.

Download the programme here. If you can’t make it, our recent edition of our newsletter Tax Justice Focus covered these issues in detail.