CANBERRA: The Australian Taxation Office has launched a sweeping crackdown on multinational oil and gas companies, accusing them of artificially pumping up billions of dollars in interest payments sent offshore to reduce tax bills here. “There are a number of audits in relation to taxpayers in the oil and gas sector already on foot in varying stages of progress,” the ATO said in a new submission to a Senate inquiry into corporate tax avoidance. The ATO said contrary to the principle established in a recent Federal Court victory over US oil and gas giant Chevron, a number of industry players were striking loan deals with overseas parents that “do not reflect commercially rational behaviour”. In tax commissioner Chris Jordan’s most direct attack on the sector yet, the ATO also sledged some players for attempting to rort rules limiting the amount of debt multinationals can load into local subsidiaries and warned oil and gas producers against following BHP Billiton and Rio Tinto by setting up sales hubs in tax haven Singapore. The ATO estimated 11 key players in the oil and gas industry paid $3.9 billion in interest to their overseas associates last financial year on $106.6bn in debt. It found the industry was largely funded by related-party loans, which represented at least 23 per cent of the value of all such arrangements in the Australian economy in 2014-15. The ATO did not identify individual interest payments, but according to analysis by activist group Tax Justice Network, Chevron and Shell are big remitters of cash to offshore associates. Chevron paid almost $2.2bn to its parent company in internal US tax haven Delaware in 2015, while Shell paid $430 million to related companies in Bermuda and Luxembourg in 2014, TJN said. TJN spokesman Jason Ward said the ATO submission “for the first time reveals the extent of the offshore oil and gas industry’s rampant use of aggressive tax minimisation practices”. “The case for reform of the taxes covering oil and gas multinationals has never been clearer.”
A Chevron spokesman told The Australian the Federal Court found it had “done nothing illegal. Chevron and the ATO disagree on how the law applies,” he said. A Shell spokesman said the company was investing more than $40bn in Australia over five years, bankrolled by “intra-group funding from overseas”. “This funding is in the form of both equity provided to the Australian business and loans. Shell Australia’s debt-to-equity ratio is roughly 50-50 — well within the prescribed safe harbour limits.” A spokesman for Revenue and Financial Services Minister Kelly O’Dwyer said the ATO had “taken significant action in the past year as part of their monitoring and compliance efforts in the oil and gas industry, which is reflected in their submission and which they had previously flagged in evidence to the inquiry”. The ATO submission, which took industry players by surprise yesterday, opens up a new flank in the battle over the tax paid by oil and gas businesses, which are already fighting a rearguard action against proposals to beef up the petroleum resources rent tax. At stake is the government’s ability to reap a much-hoped for tax windfall from more than $190bn in oil and gas projects, including the $60bn Chevron-led Gorgon project in the Browse basin off the coast of Western Australia. Other big projects mentioned in the ATO submission are two other Browse plays, Ichthys, owned by Japan’s Impex, and Prelude, owned by Shell, Chevron’s Wheatstone project in the Carnavon basin off WA, and Santos’s controversial Gladstone coal-seam gas export facility.
The ATO said there “has been a significant decline in net profit and consequently income tax payable” from the sector since 2011. While not all tax returns have been lodged, the ATO said so far income tax payable from 32 companies in the sector last financial year was about $547m — about a third of the $1.62bn reaped the previous year. It said there were a number of legitimate reasons for plunging profits in the sector, including the billions of dollars pumped into developing oil and gas fields and the divestment of downstream operations. Actual tax reaped fell short of industry projections due to cost overruns, plunging global oil and gas prices, oversupply in Australia and inaccurate modelling that failed to account for tax deductions and the effect of offshore marketing hubs. In the ATO’s legal stoush with Chevron, the Federal Court found the interest rate the company was charged by a related party on a $2.5bn loan was not negotiated on an arm’s-length basis, and stung it with a $250m tax bill. Chevron appealed its loss to the Full Court of the Federal Court, which has reserved its decision. In the meantime, “the commissioner will continue to take issue with arrangements in circumstances where an Australian subsidiary pays rates of interest on related-party loans well in excess of what is (or would be) paid on external borrowings by the multinational group, including if the subsidiary had been allowed to obtain debt funding from an unrelated third party”, the ATO said. It said in addition to auditing oil and gas players it was “continuing to work with these taxpayers to agree on mutually acceptable arrangements to be put in place on a go-forward basis”. “As a starting point, the ATO would generally compare the terms and resultant interest rates on related-party borrowings to those of external borrowings raised by the multinational group, and consider whether any differences are commercially rational.”
