The cartel which controls Australia’s vast gas reserves has been beating a path to the doors of the Big Four accounting firms lately; for the government has sallied forth with its feted tax “crackdown” – in truth, less of a crackdown than the tweaking of a couple of loopholes in the failed tax they call the PRRT. Michael West reports.
High in their splendid eyries above Clarence and Collins streets, scores of tax advisers from EY, KPMG, PwC and Deloitte have been beating their fee-clocks by the hour, cooking up fancy new loopholes, plotting how to beat the system. For the government has just announced a “crackdown” on gas companies rorting the Petroleum Resource Rent Tax (PRRT).
This is how they “game” the system; the government changes the law, or tries some feeble reform, and the Big Four promptly figure out how to undermine it. While they rake in billions from lavish taxpayer consultancy gigs, the Big Four simultaneously orchestrate the annual billion dollar rip-off of every taxpayer, indeed all 26 million Australians, by designing aggressive tax schemes for their multinational clients.
The big announcement was showcased grandiloquently in the press:
The Age/SMH: “Oil and gas giants hit with $6 billion tax hike”.
AFR: “PRRT crackdown to impact $US50 billion of gas projects”
The Australian: “Oil, gas firms face $6bn hit over next decade as Canberra toughens up …”
Whither did they dig up this marvellously large and round number of $6 billion, not to mention the “crackdown” narrative?
It was most likely hatched by a couple of staffers in Josh Frydenberg’s office. Did they order up a mega-best-case-scenario from the boffins over at Treasury then double their gas forecasts? A scenario based on the quaint, even hallucinatory assumption that Exxon, Chevron, Shell, Santos, Origin and their Big Four aides de camp would comply with the intention of the law?
This is no “crackdown”, merely the lowering in the rate of an already generous tax deduction. And now it is the task of the Big Four to chart a fresh course of loopholes to ensure their multinational clients can keep paying little or no income tax despite billions in annual revenue.
The PRRT is a failed tax. It never worked. And lowering the uplift rate – the central plank of the latest brainstorm – won’t suddenly make it work either. This is because it remains a profit-based tax and the tax giants are past-masters at eliminating profits (they funnel them offshore mostly by making big loans to themselves) so as to eliminate tax.
The more complicated the scheme, the more easily it is gamed.
What Australia needs is a “dumb old royalty” says gas analyst Bruce Robertson – a simple, flat rate on production; easy to administer, transparent, easy to collect.
“Gas is a non-renewable resource and the fact that we are not getting any PRRT on a project should be of great concern. Giving away our natural resources is not smart.”
“They should introduce a flat rate for every gigajoule of gas produced – combined with heavy penalties for breaching the system. If they know they are going to be fined $200 million, they will pay their royalties.”
With the sort of revenue which would be raised by a simple royalty and penalty regime, Australia could afford to set up a sovereign wealth fund like Norway. Instead, we have been collecting $800 million in tax compared with Qatar’s $26 billion for roughly the same amount of gas.
“They’ve lowered the deductions to five points over the bond rate. So you can still uplift your expenditure by five points on top of the bond rate but why uplift at all?” says Robertson. “I don’t get any uplift on my farm if I make losses”.
The broader context to all this is corporate welfare: mates deals, tax breaks peculiar to exploration, special exemptions, official failure to enforce tax laws such as Part IVA, a craven media and big-ticket lobbying.
The most reliably obsequious media of all, when it comes to oil and gas – edging out Fairfax Media’s Australian Financial Review by half a body-length – is Rupert Murdoch’s News Corp, which is already running a scare campaign about the horrors of the “crackdown”.
“PRRT changes may hold up oil and gas projects” is the latest headline in The Australian; harbinger for the inevitable retinue of alarmist stories persisting for years until it is quite obvious the changes had no affect whatsoever and the gas giants are still skiving out of tax.
If there were any doubt that Australia is giving its gas away to foreigners for free, it is worth considering the Ichthys project as it contains this stunning quote by ACIL Allen, an industry-based consultant famed for its pro-gas industry reports:
“ACIL Allen executive director WA and NT Mr John Nicolaou said that even under the highest oil price considered, his company forecast that the Ichthys project would pay no Petroleum Resource Rent Tax.”
ACIL Allen had the cheek to whack one of its stratospheric figures on elsewhere, claiming Ichthys would still tip in $73 billion in other taxes. When it comes to high exaggeration, the hydrocarbons industry and its consultants have rich form.
Monster gas projects may pay no tax and royalties on $33B a year
Meanwhile, as the gas producers assiduously avoid every cent they can in tax, the gas transmission monopolists are busy price gouging as well as dodging tax.
The Institute for Energy Economics and Financial Analysis (IEEFA) and Environmental Justice Australia (EJA) came out today calling for amendments to the National Gas Rules to protect consumers from another multinational tax cheat, pipeline operator Jemena.
Says IEEFA’s Bruce Robertson, “Jemena is charging twice what is reasonably acceptable, and then some.
“The Chinese and Singaporean governments are reaping huge monetary benefits due to an exemption under the law allowing Jemena to charge in excess of what is reasonable for up to 15 years,” says Robertson.
“They knowingly built an inefficient pipeline – the Northern Gas Pipeline connecting Queensland and the Northern Territory in Australia – and they are allowed to recover their costs. They can then duplicate the pipeline and again recover their costs. And under the exemption, they get 15 years grace where they can charge what they want, and nobody – not the government, the consumer, nor other pipeline operators – can appeal.
The EJA’s David Barnden, a lawyer and analyst, had exposed Jemena for tax rorting earlier this year. The group is 40 per cent owned by a subsidiary of Singapore’s state corporation Temasek and 60 per cent by China State Grid.
An offshore entity of the group had loaned Jemena’s Australian companies $800 million at 10.25 per cent return per year in an agreement that would shift more than $80 million per year from Australia overseas until 2050.
“Instead of paying market interest rates, which could be below 5 per cent, the guaranteed high return would artificially reduce Jemena’s yearly taxable income in Australia and, depending on the application of transfer pricing rules, cost Australian taxpayers around $500 million in unpaid taxes,” wrote Barnden.
“The net amount of Jemena’s debt securities increased by $640 million in 2016. Debt securities issued by Jemena in 2016 for over A$1 billion were in AUD, USD and HKD denominations with 7 to 10 year maturity. The fixed yearly returns on the instruments were between 3.25% and 3.75%, well below the fixed 10.25% return on $800 million of convertible instruments.”
The rorting is endless. When the Tax Office tried to address the “thin capitalisation” laws which seek to combat “debt loading”, that is the oil giants lending themselves billions from offshore to rake out profits via interest payments, the oil majors quickly began issuing themselves more equity to keep the debt-equity ratios just under the legislated threshold.
It should be said that the latest initiative in the “crackdown” to take onshore gas projects out of the PRRT is a good thing. The PRRT rort has principally entailed the gas majors using losses on new projects to offset the dazzling profits they reap from mature projects … ergo they keep exploring and keep paying no tax.
The transferring of losses caper had gone far too far but the “crackdown” is still a tinkering around the edges. Foreign oil majors will continue to exploit Australia by extracting billions of dollars worth of our finite resources for free.
When a sale is not a sale – Origin Energy’s unreal unrealised gain