How Shell uses Bermuda to turn tax into profit

Oil giant Shell makes clever use of the income tax rate in Bermuda: zero percent. Every euro that is made by one of Shell’s subsidiaries and flows to the island is used to propel the profit. The principal rule: keep it legal.

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It was a few minutes past 10 am on April 29th, 2008, when insurance specialist Andrea Koroluk climbed the stage in San Diego to give an important speech. The Canadian Shell manager had a clear message to the dozens of insurance specialists that had come to listen to her contribution to the annual conference of the Risk Management Society.

Koroluk participated in the conference in San Diego as a worker of Solen Insurance, a major subsidiary of the Anglo-Dutch oil company Shell. She could not give away the detailed secrets of her employer’s tax strategy, but there was more than enough left to talk about.

The risk managers in the room pricked up their ears. Shell was one of the largest multinationals in the world, a company to keep an eye on. Just like how the oil company dictated the price of petrol at the pump, so it went with its fiscal policies. What Shell did was the standard for the way that other major oil companies would settle their tax affairs.

Solen Insurance, Andrea Koroluk’s formal employer, is more than simply one of Shell’s many subsidiaries – partly due to its location. Solen, which is engaged in the insurance of oil transportation, oil refining and ships, is officially located on the tropical island of Bermuda.

For the outside world, Shell shrouds itself in mystery, but the risk managers and tax experts that were present got the picture. Solen and Shell are located in Bermuda because of the very supple approach to taxes in the country. As the rate of the profit tax on the islet is 0 percent, the profits that Solen Insurance makes are transferred in its entirety – meaning tax free – to the parent company Shell in The Hague. 

It takes effort to achieve a profit transfer like that, Koroluk told the audience. To take full advantage of the tax on the island in the Atlantic Ocean the headquarters were not to interfere with the way that Solen calculated the insurance premiums. “Otherwise, tax authorities may think that the contributions do not reflect a fair market value and the costs cannot be deducted from the corporation”, said the Shell manager.

A copy of the presentation immediately makes clear the principal message of insurance agent Koroluk. “Staying legal in the 21st century”, is what her talk was about. Always stay within the bounds of the law.

The Shell employee told the crowd that in order to achieve this constant monitoring and market research is required. If somewhere in the world a tax rate was changed, Shell’s risk managers had to get started immediately. The route via Bermuda eminently suitable for this, she showed with a handy PowerPoint picture.

Shell is not the only multinational that has discovered Bermuda as a suitable hub for its insurance premiums. In the past decades the island has been embellished with a seemingly very large industry of internal insurance companies – captives in jargon. For Bermuda this industry is of vital importance as the insurance industry is just as important for the country as its tourism.

At least eight thousand major multinational companies now have their own insurance office in Bermuda. The few multinationals that have no presence in Bermuda, have opened branches in Cayman Islands, the Bahamas, or Guernsey. These four islands – all of which have a zero percent tax rate – house almost half the global market for internal insurance.

Letterbox companies disbanded
Alarmed by questions from de Volkskrant several Dutch multinationals announce that they are busy closing their letterbox companies in tax free countries. Akzo Nobel reports that the three firms in Bermuda and the Cayman Islands are inherited from the acquisition of paint company ICI. At the moment these “companies do not have any function within AkzoNobel”, the spokesman says. The company is busy liquidating these firms.
Unilever is even more energetic in closing its subsidiaries. Seven days after de Volkskrant asked questions about its holding on the Dutch Antilles – which, by the way, does not have a zero percent tax rate – Unilever’s holding was officially liquidated. And what is Phillips doing in the Bahamas? The electronics company is busy dismantling its businesses on the island, a spokesman said.

At first glance an internal insurance company operates just like an ordinary insurance company. If a company wants to insure its ships, cranes, cars, employees, buildings or loans, its subsidiaries pay premiums to the Bermuda-based company. If there is damage, for example because of a fire or an accident, the corporation’s own private insurance company pays the damage out of the big money jar funded by these premiums. That way companies do not have to use the services of commercial (re)insurers and the profits remain in the company. So far these practices are perfectly fine.

However, there is a second advantage to the internal insurance route via Bermuda.  Insurance premiums may be deducted from the revenues.  A Shell subsidiary in for example Gabon, Australia or Brazil would detract the premiums they pay to Solen from the profits they make in these countries. 

This way these subsidiaries have less tax to pay in the countries they are operating in. Subsequently Solen makes a bigger profit in Bermuda, and does not pay any taxes over these profits. From Bermuda the profit can, in turn, be piped back, wholly untaxed, to the headquarters in the homeland.

This means that every Euro that Shell can funnel through Bermuda will propel the profits of the oil company. And – and that is the beauty of the structure – these practices are completely legal.

The big question is how much Shell earns using this tax route. The company anxiously keeps the profits from Solen in Bermuda hidden. Whereas in most European countries the profits of large companies are made public, the Chamber of Commerce in Bermuda, even after several requests for information by de Volkskrant, is only prepared to share the most basic information. For a fee of $10 the Bermuda government will give the address and registration date of a company, but the profit and loss accounts remain secret.

From the sparse information that we could gather it appears that Solen is located on the fourth floor of the Cedar House, an orange-colored business complex on Hamilton’s Cedar Avenue in Bermuda, the self-described ‘risk capital of the world’. From the Cedar house the Shell employees get a nice view of the cedars on the boulevard.

The address turns out to hold another 44 subsidiaries of Shell, from all corners of the world where the company is located, from Shell Australia shipping to Kuwait Shell Limited. Shell is not willing to tell how profitable Solen Insurance and Shell’s 44 other companies in Bermuda are. When prompted, a spokesperson tells us that this financial information is only shared with the Bermuda government. Shell is “always prepared to give information about its presence and activities in a country, to the tax authorities concerned” a spokesman said. The company points out that in comparison with other multinationals it pays quite a lot of tax – “44 percent of the profits “.

Through its evasive answers and the lack information on Bermuda we cannot note with a hundred percent certainty how the Shell route works.  However, the impressive list of companies that Shell has registered in Bermuda does give an impression.

First of all, Shell has multiple holdings on Bermuda engaged in the company’s flow of funds. These holdings invest in or lend money to subsidiaries in other countries. For example, apparently Shell lets a portion of its investment in the Russian island of Sakhalin run through Bermuda. 

Billions of euros are invested in the development of this enormous oil and gas project on Sakhalin. The huge sums of money are sent to Russia via Bermuda. Interest on the loan is deductible from the expenses made in Russia, while the profits that Shell’s subsidiary in Bermuda makes remain untaxed. Presumably, a holding like Shell Overseas Finance is used for the same purposes, albeit for different projects. When Shell Overseas Finance’ interest margin is higher than the normal. market rate,  interest margin, a greater share of the profits ends up in tax haven Bermuda.

There are also letterbox firms, like Shell Shipping Australia, which act as a leasing company. The foreign subsidiaries can hire the cranes, vessels and other equipment that they use here.  These charges reduce the profit, and thus the tax, in the countries where Shell drills for its oil and gas.

Other letterbox companies, such as Shell International Trading Middle East Limited and Shell Trading (ME) Private limited, are set up to bundle the international trade in oil and gas. This suggests that on paper the internal trade of, for example, crude oil runs through Bermuda, allowing a portion of the gains to end up on the island.

All profits from the 45 Bermuda daughters eventually end up at the Shell headquarters in The Hague. However, even after a second attempt, Shell was not prepared to share information about the sums that are involved. “In our earlier extensive response, we stated that Shell is compliant with the applicable laws and regulations. Royal Dutch Shell’s annual report includes all relevant public information on taxes and tax payments. We will not elaborate on the supplementary questions regarding Bermuda.”

That Shell (with its 90.000 employees and an annual turnover of 470 billion euro’s) probably has the upper hand in negotiations with Bermuda (65.000 inhabitants and a national product of 4.5 billion) does not take anything away from it.   

This way the line of defense of Shell, which trumpets its commitment to corporate social responsibility, stays intact. Since, as the company emphasizes, they focus on the standards of the OECD, and the OESO is of the opinion that Bermuda is not a tax haven. Regardless of the fact that the country has a zero percent tax rate.

Professor of fiscal economics and director of the scientific bureau at Deloitte Tax, Peter Kavelaars, has great difficulty with the OECD guideline. With a tax rate of zero percent you can certainly label a country a tax haven, he says. “Looking at the tariffs from a Dutch perspective, a profit taxation of ten percent is really the bare and necessary minimum.”

He considers the OECD directive that Shell fences with a sham. “This is the wrong approach,” says Kavelaar. According to him, countries worldwide should, when taking all the taxes together, have a tax burden of at least 20 percent. He also calls for transparency. “Countries should be transparent about their information and know no banking secrecy. Companies should always be required to publish their commercial annual accounts.”

Researcher Mark van Dorp of Somo, an organization that advocates a fairer and more just taxation system, also criticizes the practices of multinationals in tax havens. “Companies are hiding behind the local regulations. Large firms, however, have the social responsibility to share more information about the consequences of their fiscal practices.  Just as a company must not harm the environment, it should not disadvantage governments by avoiding taxes.”

Andrea Koroluk still has a job as an insurance manager for Shell. As far as one could tell, she does her work well. Shell took note of the lessons that she put on paper back in 2008. Since her speech in San Diego the company did not have to deal with the ‘fines, penalties and imprisonment’ as a result of the violation of tax laws which she warned against in her talk.

Shell did, however, make a net profit of 22 billion euro’s in 2012. With help from Bermuda.

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