How businesses are taxed

Governments use tax to raise revenues. Revenue agencies audit and collect these taxes. Most businesses are subject to tax, regardless of whether they are multinational corporations or home-office enterprises. Businesses pay direct taxes to the government and they collect indirect taxes on behalf of governments as a supplier of goods or services.

This report details our country-by-country report data for 2020, in line with the Organisation for Economic Co-operation and Development (OECD) standards. It includes the available data for countries and locations in which we have a taxable presence. The data include corporate income tax paid, profit before tax and tangible assets.

Tax systems around the world vary and can be complex. However, the tax systems in places where Shell does business have some basic rules in common.

Most businesses pay corporate income tax where profits are made

Corporate income tax is typically due by law in countries where profits are made. This should correspond to where the 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. Corporate income tax is payable on profits, not revenues. See the table “Simplified example of application of local tax law” for how tax rules are applied to calculate the 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 line with the positions of the United Nations and the OECD.

In 2020, Shell reported a total loss before tax of $27 billion. Shell companies still paid $3.4 billion [A] in corporate income tax as some of our companies reported a profit in 2020 and/or settled taxes from the previous year. Shell paid a further $3.5 billion in royalties to governments. We also reported a corporate income tax credit of $5.4 billion for 2020. 

In most countries and locations, the corporate income tax we pay differs from the accounting tax credit or charge. This is because tax paid can include payments relating to previous years, the current year and future years.

Our effective tax rate (ETR) is calculated by dividing the tax credit of $5.4 billion by the total loss before taxation of $27 billion, resulting in an ETR of 20.1% for 2020. For comparison, the average corporate income tax rate levied by the 37 countries that were members of the OECD in 2020 was 23.1% [B].

Our ETR is a blend of the different statutory tax rates applied to our various businesses and the different tax laws with which we have sought to comply.

In the past three years, our ETR has been higher than the average corporate income tax rate in OECD countries, partly because many governments apply a higher corporate income tax rate to profits made by oil and gas production activities. In some cases, this tax rate can be more than 80%.

Our lower ETR for 2020 was the result of asset impairments of $28 billion recorded that year, resulting in an overall tax credit of $5.4 billion.

[A] This figure comprises $3.3 billion taxes paid in 2020, disclosed as part of cash flow from operations, and $132 million of accrued withholding taxes on dividend, interest and royalty payments to Shell entities. It does not include withholding taxes collected by Shell on dividends paid to shareholders. For more details, see the chapter on Our tax data.
[B] Source: OECD Tax Database (2020), Table II.1. Statutory corporate income tax rate.

Tax generates revenue for governments

Tax revenues enable governments to pay for public services, such as education, health care and transport. 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. Companies must comply with relevant tax laws. Audits and controls by tax authorities help to check whether companies are compliant.

Governments can use targeted tax incentives for specific policy objectives, such as protecting the environment, reducing carbon emissions or 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. When available and appropriate, we make use of tax incentives and exemptions where we have a business activity that qualifies.

Some governments may choose to lower specific taxes, like corporate income tax. These are deliberate policy decisions and not unintended tax loopholes. Such incentives are designed by governments to attract investment in areas where development may benefit their countries. When governments offer such incentives, they may expect to raise revenues through other types of taxes, such as employment taxes or export duties.

Companies pay and collect a range of taxes

Companies pay and collect a range of taxes. These include:

• Corporate income tax: direct tax on profits, after operating costs have been deducted from revenues.
• Value-added tax (VAT): indirect tax due on the purchase of goods and services, typically as a percentage of the sales price of the item or service. Companies administer VAT collection and payment on behalf of governments.
• Employment tax: companies routinely collect income taxes on employees’ salaries and pay these taxes to the government.
• Excise duty: an indirect tax on manufacturers due at the point of production rather than sale, which generally forms part of the cost of the product.
• Customs duty: an indirect tax imposed on goods as they either enter or leave a country.

According to 2018 figures from the OECD [C], a government’s largest source of revenue typically arises from employment taxes, which include personal income tax, payroll taxes and social security contributions. 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 paid by consumers but in some cases also by businesses. These include non-recoverable VAT, customs, excise and other duties.

When a business collects indirect taxes on behalf of a government, it carries the cost of gathering the financial data, preparing reports and executing payments. This process helps governments collect taxes more efficiently because it is easier to collect VAT from businesses than from individual consumers.

OECD data on the average split of member countries’ tax revenues show that corporate income tax raises around 10% of total tax revenues.

[C] Source: OECD (2018), Revenue Statistics 2020, OECD Publishing, Paris.

Companies operating in the oil and gas industry also contribute to public finances by paying royalties, bonuses, fees, and a host government’s production entitlements. For example, in 2020 we paid around $7 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 2020 as a result of our exploration and production activities.

This report focuses on corporate income tax as this tax has attracted interest from investors, non-governmental organisations and wider society.

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