How businesses are taxed
Most businesses are subject to tax, regardless of whether they are multinational corporations or home-office enterprises. Governments use tax systems to raise revenues. Revenue agencies audit and collect these taxes. Taxes can include corporate income tax, value-added tax (VAT), employment taxes, excise duties and levies.
This report details our country-by-country report data for 2018, in line with the Organisation for Economic Co-operation and Development (OECD) standards, for countries and locations in which we have a taxable presence, and where the data is available for this report. The data includes corporate income tax paid, profit before tax and tangible assets.
Tax systems vary and can be complex. But the tax systems in places where Shell does business have certain basic rules in common.
A. Most businesses pay corporate income tax where profits are made
Corporate income tax is typically due by law in countries where profits are made, which should correspond to where business activity occurred. The tax due is determined by the tax system of the country or location where that activity took place. Governments design and apply tax rules to the profits generated in their countries and assess what is owed by businesses. See the example below for how these rules are applied to calculate tax due.
Sometimes a multinational enterprise like Shell faces double taxation. This is when two countries seek to tax the same business income, resulting in a company being taxed twice. We believe that profit should only be taxed once.
In our Annual Report and Form 20-F we reported a corporate income tax charge of $11.7 billion on our 2018 profits. Our effective tax rate (ETR) was 32.9%. For comparison, the average corporate income tax rate levied in 2018 by members of the OECD was 23.9%.
Our ETR is higher than the average corporate income tax rate in OECD countries partly because many apply a higher corporate income tax rate to oil and gas activities. In some cases, this tax rate can be as high as 80%. Our ETR is a blend of the different statutory tax rates applied to our various businesses and the different tax laws we have complied with.
The tax charge in our Annual Report and Form 20-F is the amount of corporate income tax we expect will be due on current-year profits, based on international accounting standards. The corporate income tax we paid in 2018 was $10.1 billion, less than the $11.7 billion tax charge.
The amount of corporate income tax we pay will be different to the tax charge because some tax regimes may require the payment of tax in arrears as well as in advance. For example, tax paid could include payments in relation to previous years and partial payments in relation to the current year. It would not mean we have made an underpayment of taxes.
Shell’s global profit of $35.6 billion for 2018 is assessed by the tax authorities in the countries and locations where our activities created value.
B. Tax generates revenue for governments
Tax revenues enable governments to pay for public services, such as keeping communities safe and providing health care. Governments set their fiscal policies and the rules for individual and business taxes. Tax treatments — such as tax rates, reliefs, exemptions and allowances or disallowances — are typically approved by national parliaments. Like all laws, tax laws must be complied with. Audits and controls by tax authorities help to check whether companies comply with tax laws.
Governments can use targeted tax incentives for specific policy objectives, such as protecting the environment, reducing carbon emissions and encouraging advances in areas like research and development. Governments often design incentives to attract domestic and international investment, which can boost economies, create jobs and develop communities. Where offered and appropriate, we use tax incentives and exemptions where we have a qualifying business activity.
Some governments may choose to lower certain taxes, like corporate income tax. These are deliberate fiscal policy decisions and not unintended tax loopholes. They can be used to attract investment in areas where development may benefit their country and where government revenues may increase through other types of taxes such as employment tax.
C. Companies pay more than corporate income tax
Companies pay and collect a range of taxes, including corporate income tax. According to figures from the OECD, governments' largest source of revenue is personal income tax resulting from employment. Most employment taxes are paid by employees, but some are paid by companies. Governments also generate revenue through indirect taxes on products and services, often as consumption taxes borne by consumers but in some cases also by businesses. These include non-recoverable VAT, customs, excise and other duties.
The OECD data on the average split of member countries’ tax revenues shows that corporate income tax raises around 9% of total tax revenues.
Companies operating in the oil and gas industry also contribute to public finances by paying royalties, bonuses, fees, and production entitlements. For example, in 2018 we paid $14.3 billion in production entitlements. This is more than we paid in corporate income tax.
Our Payments to Governments Report shows how we directly contributed to public finances in 2018 as a result of our exploration and production activities.
This report focuses on corporate income tax as this is a tax that has attracted interest from investors, non-governmental organisations and wider society.