{"id":8961,"date":"2023-02-07T11:00:00","date_gmt":"2023-02-07T11:00:00","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=8961"},"modified":"2023-02-10T10:47:18","modified_gmt":"2023-02-10T10:47:18","slug":"shell","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/02\/07\/shell\/","title":{"rendered":"Is it right that Shell and BP made $70bn profit in 2022 but pay little tax in the UK? Yes. And also, no."},"content":{"rendered":"\n

UPDATED with BP profit announcement<\/strong> and further thoughts<\/strong><\/p>\n\n\n\n

Only a small proportion of Shell and BP’s profit is made in the UK, so we should be unsurprised that only a small amount of their huge profits are taxed in the UK. But when energy companies make “windfall profits”, at the expense of the rest of us, there is a case that normal principles shouldn’t apply, and the windfall should be taxed.<\/em><\/strong><\/p>\n\n\n

Shell<\/h2>\n\n\n

Here are Shell’s unaudited financial statements for 2022<\/a>:<\/p>\n\n\n\n

\"\"<\/figure>\n\n\n\n

$65bn of pre-tax profit – more than twice that for the previous year – and $22bn of tax. That’s a 34% effective rate – which we’d normally say is around what we’d expect (much higher than a normal company, because oil\/gas extraction tends to be subject to special taxes).<\/p>\n\n\n\n

Nothing surprising.<\/p>\n\n\n\n

No figures yet on how much of that $22bn of tax will be paid in the UK, but it’s likely very small. Why? Because only 5% of Shell’s business is in the UK. The rest is abroad, and we don’t tax that. <\/p>\n\n\n\n

Before 2009, the UK *did* tax foreign profits, but with a complex tax credit system to stop anything being taxed twice. Why did the UK abandon that, and move to an “exemption” system where we almost never tax foreign profits? A mixture of:<\/p>\n\n\n\n

    \n
  1. A series of daft CJEU decisions made it difficult and perhaps impossible in practice<\/a> to operate a credit system without breaking EU law. <\/li>\n\n\n\n
  2. The credit system was *very* complicated, and it’s unclear it ultimately raised more tax.<\/li>\n\n\n\n
  3. For these reasons, other countries had dropped the credit system, and the UK government wanted to be “competitive”<\/li>\n<\/ol>\n\n\n\n

    So there is nothing surprising about only around $1bn of the perhaps $22bn total Shell tax bill being paid in the UK. Nothing to see here. Move along.<\/p>\n\n\n\n

    Except…<\/p>\n\n\n\n

    These are not normal times. This is not a normal level of profit. Shell made twice as much profit in 2022 as in 2021, but not by being twice as clever. Shell simply is benefiting from the same high energy prices which are hurting households and businesses across the world. There is an obvious political case for rebalancing that equation, and redistributing some of Shell’s winnings back to the people who lost the great 2022 energy game (us).<\/p>\n\n\n\n

    Often these kinds of populist political arguments have large economic and tax policy downsides. In this case, it’s different. Shell’s profits aren’t just normal profits – they’re “economic rent”<\/a>. Shell is – by pure accident – making a return which doesn’t just exceed its costs, but exceeds the normal return it would expect for the risks that it runs. In other words: a “windfall”.<\/p>\n\n\n\n

    Standard economics and tax policy says we absolutely *should* tax economic rents that arise by accident. And because those profits arise by accident, that shouldn’t deter investment, or create economic distortions. Here’s what the Mirrlees Review<\/a> – the bible of conventional tax policy – says:<\/p>\n\n\n\n

    \"\"<\/figure>\n\n\n\n

    I’d conclude:<\/p>\n\n\n\n