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sharing in governance of extractive industries

Big oil strikes it rich in tax overhaul and looks to repeal landmark transparency law

US oil companies scored big wins in the recent changes to the tax code, and now aim to dismantle Section 1504, the pioneering anticorruption provision that requires them to disclose their payments to governments globally.

Activists outside the offices of Chevron are calling for oil companies to accept strong rules to implement the transparency provisions in the Dodd-Frank Wall Street Reform Bill of 2010. Actors portrayed oil companies as monkeys in the "see no evil, speak no evil" proverb, as a way to expose efforts by the oil industry to encourage the Securities and Exchange Commission to enact weak rules that will allow them to continue to make secret payments to governments. (Photo: Scott Dalton / Oxfam America)

It’s no secret that US multinational companies walk away as clear winners in the new sweeping changes to US tax law.  Corporate tax rates are slashed from 35 percent to 21 percent.  Foreign income of US-based companies is taxed at a reduced rate.  And past profits hoarded offshore can be brought back to the US at a bargain tax rate of 15.5 percent or less.  All of this as the new law deprives the Treasury of over a trillion dollars that could be used to combat poverty and rising inequality.

But the oil sector, already supported by lucrative subsidies, secured additional benefits.  The industry now sets its sights on getting rid of Dodd-Frank Section 1504, a landmark anticorruption law meant to shine a light on billions in financial flows between oil companies and governments.

A Big Oil wish list fulfilled

Even before the tax law, the oil sector, like other fossil fuel sectors, scored a number of policy victories in 2017. Drilling for oil and gas in national parks is now a possibility, the US rejected the Paris climate change agreement, the Dakota Accessand the Keystone XL pipelines were approved, and the drilling safety regulations enacted after the 2010 Deepwater Horizon oil spill were eliminated.

But with massive changes to the tax code on the horizon in late 2017, multinational oil companies saw another opportunity to maximize their gains, and got Congress to grant them additional tax breaks:

  • Exempting oil-related income from an existing tax on US-controlled foreign corporations: Since the 1960s, US tax law has taxed certain profits of foreign subsidiaries at the corporate income tax rate. The new law allows foreign refining, transportation, and distribution income from oil and gas products to escape this tax. The Joint Commission on Taxation estimates that this new provision will reduce US tax receipts by $4 billion over the next 10 years.
  • Exclusion of “foreign oil and gas extraction income” from the newly-defined Global Intangible Low-Taxed Income (“GILTI”): GILTI taxation is a new minimum tax on high foreign profits meant to discourage US multinationals from offshoring jobs and profits. GILTI is taxed at a minimum of 10.5 percent (with credits for 80 percent of foreign taxes paid). It is unclear how much of a windfall oil and gas companies might get from their production activities being excluded from this provision.
  • Bonus: ANWR: As a non-tax giveaway to the oil sector, the tax law also opens up the one-of-a-kind Arctic National Wildlife Refuge (ANWR) to oil development, access that the industry’s main lobbying group, the American Petroleum Institute (API), has clamored for. Soon after, the US Department of the Interior also announced a plan to open the majority of the American coastline to offshore drilling, though Florida has since been excluded.

Congress and the SEC must not let Big Oil torpedo transparency

With these big policy wins, penny-pinching oil giants can laugh all the way to the bank – at the expense of the public treasury.  And if that wasn’t enough, they now want to scrap a law that allows citizens around the world to know how much oil companies are actually contributing to government coffers. The oil sector has turned its attention back to fighting Section 1504 of the 2010 Dodd-Frank Act.  Also known as the Cardin-Lugar provision, Section 1504 requires US-listed mining, oil, and natural gas companies to report their payments to the US and other governments around the world, reducing risks of opaque and corrupt transactions in sectors where risks are already elevated. Cardin-Lugar set a worldwide example for disclosures, and the EU and Canada enacted similar legislation following its passage in the US that has since led to payments to governments reports by major oil and mining  companies including BP, Royal Dutch Shell, and Barrick Gold.

Since the law was passed, US oil companies and their allies have fought tooth and nail for secrecy. They attempted to water down and delay the strong 2012 implementing rule proposed by the Securities and Exchange Commission (SEC), including with an API lawsuit. Oxfam joined the SEC to protect the rule in court. And while API managed to convince a judge to mandate a rewrite of the rule for procedural reasons, the SEC produced a strong and fair final rule in June 2016. Unfortunately,  API and its allies – including Secretary of State and former Exxon CEO Rex Tillerson who lobbied the SEC against a strong rule – ultimately won a Valentine’s Day victory last year when Congress nullified the rule, requiring the SEC to go back to the drawing board to propose a new rule by Feb. 14 of this year.

US oil companies have also resisted efforts to publish their US tax and royalty payments, effectively forcing the US to withdraw from the Extractive Industries Transparency Initiative (EITI) in November and setting a discouraging example for other EITI countries. Despite the oil sector’s significant tax breaks in the US, major American multinationals such as Chevron, ConocoPhillips, and Exxon refuse to reveal what they do pay to the US government, even while their foreign counterparts have been forthcoming with disclosures.  This prevents US citizens from understanding how much the oil companies contribute to the federal budget, even as oil companies have pushed for greater tax relief: If US EITI implementation continued, a comparison of published payments at the end of 2018 with payments in 2016 and 2017 would show the total benefits the oil sector reaped in the recent rewriting of the tax code.

Now, Section 1504 itself is under attack.  The House Financial Services Committee has already voted in favor of HR 4519, a bill to repeal the provision entirely.  If the bill becomes law, the US will relinquish its leadership on good governance in extractive industries, and facilitate an environment where neither investors nor civil society can rest assured that US-listed companies’ activities do not rely on bribery and corrupt activities.  As my colleague Isabel Munilla explains in The Hill this week, “Oil and mining corruption and revenue theft undermine democracy and are often a precursor to destabilizing conflicts that can shut down investment and disrupt economic growth for decades.”

After its recent success lobbying for tax breaks and deregulation, the oil industry seems committed to blocking the Cardin-Lugar provision in any way possible.  But opacity in the extractive sectors permits corruption to flourish and impedes public accountability both in the US and abroad.  Congress should maintain the current anti-corruption law and ensure payment disclosure, with a strong rule from the SEC.

(originally posted on The Politics of Poverty)

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