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Economics References Committee
14/03/2018
Corporate tax avoidance

CATO, Ms Jessie, National Coordinator, Publish What You Pay Australia

FLETCHER, Dr Luke, Executive Director, Jubilee Australia Research Centre

Committee met at 08:02

CHAIR ( Senator Ketter ): I declare open this hearing of the Senate Economic References Committee for the inquiry into corporate tax avoidance and aggressive minimisation by Australian companies and multinationals operating in Australia. The Senate referred this inquiry to the committee on 2 October 2014, to report by the first sitting day in June 2015. The Senate has extended the reporting date for the inquiry on a number of occasions, and the inquiry lapsed at the end of the 44th Parliament. The inquiry was readopted in the 45th Parliament, with a reporting date of 30 May 2018. On 1 December 2016 the committee resolved to broaden the scope of the inquiry to include Australia's offshore oil and gas industry. The committee has asked to receive submissions on the treatment and/or payment of royalties, the Petroleum Resource Rent Tax, deductions and other taxes by corporations involved in Australia's offshore oil and gas industry, including matters relating to the collection of these moneys by government. The committee has received 167 submissions so far, which are available on the committee's website. Three submissions have been received as confidential.

This is a public hearing and a Hansard transcript of the proceedings is being made, although the committee may determine or agree to a request to have evidence heard in camera. I remind all witnesses that in giving evidence to the committee they are protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a witness on account of evidence given to a committee and such action may be treated by the Senate as a contempt. It is also a contempt to give false or misleading evidence to a committee. If a witness objects to answering a question, the witness should state the ground upon which the objection is taken and the committee will determine whether it will insist on an answer. If the committee determines to insist on an answer, a witness may request that the answer be given in camera. Such a request may also be made at any other time. I would ask photographers and cameramen to follow the established media guidelines and the instructions of the committee secretariat. Please ensure that senators' and witnesses' laptops and personal papers are not filmed.

I now welcome representatives from Publish What You Pay Australia and Jubilee Australia Research Centre. Thank you for appearing before the committee today. I invite you to make a brief opening statement, should you wish to do so, and then we will open it up for questions.

Ms Cato : Thank you for the opportunity to speak with you today. Australia needs legislative change to increase transparency in our extractive sector. Today I would like to give you a brief example of how mandatory reporting legislation would provide Australia with the data required to create a transparent and accountable sector and why some multinationals oppose this. While no one single measure is a panacea for addressing tax avoidance and minimisation, mandatory reporting on payments by companies is one of the most powerful mechanisms available for reducing it, which is why 30 countries have now introduced these laws. When companies are questioned on taxes disclosed through our current public reporting, the absent or highly aggregated data gives them an easy way out from scrutiny by simply allowing them to claim that these figures do not truly reflect their tax position, with no requirement for them to provide any disaggregated data as evidence.

ExxonMobil Australia's reporting is a perfect example of this in practice. Information released under the 2015-16 ATO Report of entity tax information shows that they had a total income of over $6 billion and yet reported no taxable income or tax payable. The ExxonMobil Australia tax fact sheet published through the voluntary tax code claimed that in an average year they pay over $2 billion in total taxes. So where and what exactly is this $2 billion in total taxes? This is not solely an issue with ExxonMobil. Publish What You Pay Australia searched the 2015-16 ATO data and found 13 mining, oil or gas companies who reported a total income in excess of $1 billion that report no tax payable. Of those 13 companies, eight are Australian subsidiaries of a large multinational incorporated overseas. Three of them—ExxonMobil, Chevron and ConocoPhillips—have a documented history of lobbying governments overseas to kill off or water down mandatory disclosure provisions.

To give you an example of what is achieved through mandatory reporting, I am going to turn my attention to another multinational often named and shamed for its tax practices: Glencore. In the 2015-16 ATO Report of entity tax information, Glencore Investment reports an eye-watering total income of $18.3 billion, but it registers no taxable income and no tax payable. Like ExxonMobil Australia, Glencore likes to publish useless aggregated figures to defend its tax contribution to Australia. Their online tax transparency in Australia PDF proudly states that in 2015 and 2016 they paid $1.3 billion combined in taxes and royalties in Australia.

First, I want to clarify that there is a simple reason mandatory reporting laws around the world require that companies must report separately on their taxes from their royalties, and that is quite simply because a royalty is not a tax. Combining these two distinct payment categories into one is a common reporting tactic for companies who need to obscure their figures. Under UK law, Glencore must mandatorily and publicly report its payments to government on a country-by-country and project-by-project basis. Glencore's payments in the UK are reported in the US dollars. Their tax payment to Australia in 2015 was $66 million and their royalty payment was $390 million—or, if you want to do the maths the Glencore way and wrongly report these figures together, you will have a total payment in 2015 of $456 million. In 2016, they reported tax payment of just $8 million. Glencore has 10 projects in Australia, all in production. Nine of those 10 projects in 2016 reported no tax. The entire $8 million in tax comes from just one project, in New South Wales. Their royalty payments for 2016 are $340 million. Combined, this makes a total payment to Australia of US$348 million. Even after converting the 2015 and 2016 figures to Australian dollars, by their own reporting there is no record of Glencore paying $1.3 billion in taxes and royalties in Australia as they have claimed.

So how can the state this? In the same way that ExxonMobil can claim a tax payment to Australia of $2 billion. It's because Australian law does not require disaggregated public reporting. The tax figures these companies are claiming are not just taxes on income but aggregated figures that include taxes not required to be reported through mandatory disclosure, such as GST, payroll tax, employee income tax and local land taxes. I'm not saying that they shouldn't be paying these taxes—of course, they should. But paying one does not absolve you from paying another. For Glencore to report $18 billion in total income, have 10 projects that are all in production and be paying no tax on nine of those projects raises a big red flag of aggressive tax minimisation practices. This is why we need mandatory disclosure reporting in Australia.

The ATO Report of entity tax information indicates that Glencore paid no tax in Australia in 2015-16, which is false. Mandatory reporting under the UK law shows they did—they just didn't pay very much, and they certainly didn't pay the billions that they claimed. Without the UK law, we wouldn’t know that, and it's a much more important figure to know. You need disaggregated project level data to truly show a company's tax contribution, which is why companies like Exxon lobby so hard against. It removes the aggregated lump of figures that they can hide behind.

Publish What You Pay Australia welcomes the recent ALP announcement of a mandatory reporting policy and the support from other submissions, including the Tax Justice Network and the ACTU. But robust implementation will require whole-of-government support. Every single argument put forward by companies like Exxon against these laws overseas has been proven false as they have been put into practice, and any company that promotes opacity damages the reputation of the entire sector and loses their social licence to operate here.

CHAIR: Thank you very much. Dr Fletcher, do you have an opening statement?

Dr Fletcher : Yes, I do. Thank you for the opportunity to appear before you this morning. I am going to focus my comments today towards Papua New Guinea and on the PNG LNG project specifically. You are going to hear a lot about the Australian context, as you should, for most of the day, but I'm going to draw the links between Australia and PNG with regard to tax.

PNG is our closest neighbour, our former colony, our largest aid recipient and a country whose ongoing insecurity and lack of prosperity can have serious consequences for us here in Australia. By way of context, I want to start with the observation that PNG's current financial and development crisis is part of a larger problem connected to the well-known phenomenon of the resource curse. In PNG's case, it is the size of the resource sector exports that is the problem. In the 1970s, PNG's resource exports were around 40 per cent to 50 per cent of total exports. This number has gradually grown such that, over the past decade, our research has shown that the resource exports have averaged around 80 per cent of PNG's total exports, which is extraordinarily high.

Over this same period we have seen PNG's human development indicators stagnate and decline. As an example, of the 45 countries regularly assessed by the Asian Development Bank, PNG is at or near the bottom on many of the most important human development indicators. Just to name a few: malnutrition, infant mortality, access to clean drinking water, access to electricity and I could go on.

The exploitation of the large gas resources in the PNG highlands was supposed to change all this—and this brings us to the PNG LNG project, which is led by Exxon and Oil Search. The project was approved in 2009 and has been operational since 2014. The argument of the supporters of the project, which was just about everyone, was that the revenues were going to be so large they would provide a war chest for the PNG government to develop the country's schools, hospitals, roads et cetera as well as alleviate the impacts on the rural poor, who were likely to suffer because of decreased agricultural revenues. In other words, the revenues were projected to be so big that they would cut through the curse—but this is not what has happened.

There was a boom in the construction phase, but in the operational phase the revenues have not come as expected. Indeed, coincident with the gas craze there has been a significant decline in resource sector revenues. Resource taxes used to be between 10 per cent and 25 per cent of resource GDP. Since 2016 there has been a precipitous fall and it is projected to be under five per cent for the next few years moving forward. Predictably, we have seen not only development indicators in PNG continue to stagnate but also that the country has been thrown into another financial crisis.

Let's examine this more closely from the perspective of the payments from Oil Search and Exxon—the two main companies involved. The combined company tax payments from Exxon and Oil Search were around 460 million kina for 2014—one kina is about 40 Australian cents—dropping to around 50 million kina and 60 million kina for both 2015 and 2016 and possibly less depending on which figures you believe. Contrast this with the likely revenue that we've estimated for Exxon in 2016 of around 3.2 billion kina, and the project as a whole made almost 10 billion kina in that year from its sales. It is therefore clear that neither Exxon nor Oil Search were paying anything like the 30 per cent of company tax that we would expect. The other two large payments, royalties and development levies—they are separate to taxes—are also much lower than we would have expected. The IMF, for example, has pointed out that royalties in 2016 were expected to be around 290 million kina but instead are around 50 million kina.

So why are the resource sector and the big LNG companies paying so little tax? Yes, some of it is due to lower than expected commodity prices, including the oil price, and some of it is due to greater debt payments from a slight blowout in costs, but there are two other phenomena at stake. One reason is the pattern of tax concessions, tax holidays, tax credit schemes and other loopholes and agreements made between companies and governments, which you are going to be hearing about today, that is happening in Australia. The other reason is, undoubtedly, the aggressive tax avoidance used by ExxonMobil and Oil Search, detailed in the joint submission by the Make Exxon Pay Coalition and the Tax Justice Network—shell companies in the Bahamas and that sort of thing.

Why is this relevant to us as Australians? First of all, the Australian government lent $400 million of taxpayer money to the PNG LNG project via Efic's National Interest Account. Efic lent a further $100 million of its own money, which is taxpayer backed. Efic has also lent to many of the largest mines in PNG, including the Panguna mine, the Porgera mine and the Ok Tedi mine. This is not the only example of an Efic supported project that has seen large-scale tax avoidance. A report by Dutch group SOMO pointed out huge tax losses for the Mongolian government as a result of Australian company Rio Tinto's Oyu Tolgoi mine, a project to which Efic also lent. Finally, the same tax regimes that allow for companies like Exxon to benefit from these huge concessions and avoid paying tax in PNG are also in place in Australia, as you'll be hearing more about today. In other words, they have the same problems that we do here, partly because their laws are based on our laws and our advice—not wholly, but partly.

I'd like to finish with two recommendations. Our first recommendation is that Efic must report to parliament before it makes any loan above a certain threshold to an extractive industry project. At the moment there's no accountability to parliament. When it's done on the National Interest Account, it's done through cabinet and, when it's not, it's just done through Efic's own processes. This reporting must include detailed explanation of how it intends to make sure that companies involved will pay their fair share of tax. Secondly, we believe that sanctions should be made available and enforced for companies that receive support from government or quasi-government agencies, like Efic, and are subsequently found to be avoiding tax responsibilities—for example, ineligibility for further loans of support for a period of years. There's precedent for this in Canada with their new human rights ombudsperson.

Finally, as a member of the Tax Justice Network and the Publish What You Pay groups, we would like to support all the recommendations in their submissions. We're members of both organisations. We would highlight the importance of the first two recommendations of the Tax Justice Network submission—the project-by-project mandatory disclosure, which Ms Cato talked about. We'd also strongly recommend reviewing and reducing the allowable tax concessions here. That will have an influence in PNG as well. If we're not doing it here, how can we expect PNG to do it? Thank you very much for your time.

CHAIR: Thank you very much, Dr Fletcher. Ms Cato, to start off, your submission touches on the fact that the OECD has identified extractive industries as being the most corrupt economic sector in the world. Can you tell us in what context that occurs? I understand there's the Foreign bribery report of 2014, which makes this rather extraordinary conclusion.

Ms Cato : Corruption occurs in the extractive sector across the whole chain. There are different organisations that look at different bits of it, and because it's such a large chain and because most projects have such a large life there are different areas where corruption can occur. It's right down from the awarding of licences—we've seen that with Sundance Resources, an Australian company that's operating in the DRC, who were bribed to get their licences—through to, as other people will talk to you about today, the different kinds of tax breaks that people make through to arms-length transfer pricing and so on. So there's a whole chain of where corruption occurs, and that's why the extractive sector is so rich for it to occur in. There are a lot of behind-the-doors deals made. There is a lot of information that the average person or the community doesn't have access to or perhaps doesn't understand. And it's done at a global level. So it's quite easy to disguise where you're shifting things, particularly where Australian companies are operating overseas, where it's all happening at the local level. Even in Australia, you can see that we still have large multinationals coming in, and we have large companies here operating. So every country that is resource rich tends to have a global extractive sector.

CHAIR: A very compelling reason as to why transparency is an important feature here. Can you explain Exxon's involvement in the Dodd-Frank bill and section 1504?

Ms Cato : As I outlined in my submission, Exxon have a long history in campaigning against Dodd-Frank. Dodd-Frank was the first, I guess, mandatory disclosure bill—section 1504, anyway—and it was what kicked off the conversation in the EU. It was vacated the first time after a lawsuit by the API—Exxon is a member of the API—and then it was held up in legislation and then a rule was finally brought in. Exxon and API both met and lobbied with Donald Trump to remove section 1504 of Dodd-Frank, and that was because they don't want to report, on the project level, their tax payments. Exxon is only listed in the US. Where we've seen these laws implemented in other countries, they capture every company that is listed on that stock exchange. While only 30 countries have these laws, you capture a whole lot of companies that are listed. While Exxon, Chevron and ConocoPhillips have subsidiaries—and Exxon has a subsidiary that reports under the UK—their main structures are only listed in the US. This was argued against, that it was uncompetitive to business and that it would hurt the company, but as we've seen we've had close to 100 companies reporting under the UK laws. When we saw this in the US Extractives Industries Transparency Initiative, the EITI—that's a domestic reporting mechanism that Australia has signed up to but has not implemented as well. They now require project level reporting, too. That was when Exxon and Chevron both decided to not continue with the US EITI, and they pulled out and essentially killed it. You can't be found compliant with the EITI if the companies that are participating won't give you that information. We know it's an issue with the project-level reporting that they don't like.

CHAIR: As I understand it, Exxon is on the Extractive Industries Transparency Initiative board?

Ms Cato : They are on the global board. At the last meeting, civil society from the US put a joint letter in to get Exxon and Chevron removed. Obviously, from a civil society perspective, we think it's hypocritical to support a transparency measure that you won't participate in yourself.

CHAIR: Do both of your organisations hold similar concerns to the Australia Institute in that companies are presenting information to the public about their contribution to the economy as well as tax paid that shows very large figures when things like public ATO reporting show a very different picture?

Ms Cato : As I gave in the example, if you look at the ATO report of entity and it shows zero, and then you look at something that's aggregated, like mandatory disclosure, you will get a figure. I think that is a conversation that we're not having as nuanced as we should be. It hurts all of us, really. One of the issues with the ATO report of entity is that if you see a zero it may not be zero; it may be a negative number. But we don't see that. The handout that I gave you before on Glencore's project level reports for 2015 and 2016—they have to report that negative number. When we see the zero next year, we can assume that that negative tax has been rolled forward as tax credits. If you look at the ATO and you just see 'Exxon: zero' you don't know what that is. That could be a multimillion-dollar negative number or it could be zero, but we don't have the disaggregated reporting to know that. You have one set of figures coming out there, and, as I said, that gives companies a really good defence to just be like: 'Well, this isn't disaggregated enough. This doesn't truly show our tax position.' And then you have stuff coming out from overseas, like I said with Glencore, where you have $1.3 billion in Australian publications—almost $500 million in royalties and tax—but they can claim that here because we don't ask them to disaggregate that. They can sit there and say, 'Well, we paid X amount in GST, and that's a tax, so therefore we pay taxes.' If any of us tried that with the ATO, we wouldn't get away with it.

CHAIR: Would you like to table this?

Ms Cato : Yes.

CHAIR: There is no objection to this document been tabled. Have you had a look at ExxonMobil's tax facts glossy that was part of their 2016-17 tax transparency disclosure?

Ms Cato : Yes.

CHAIR: Do you believe that the $20 billion of investments that are set out there are credible?

Ms Cato : $20 billion of investment—it's hard to say, because what is it? I can't tell you if it's credible or not, because I don't know what it is. I think that's kind of the point that I'm trying to make: people are going to talk to you today about the tax system and about how to fix that tax system. I really want you to keep in mind that we shouldn't be having this conversation without talking about the fact that we have no data. If I don't know what $20 billion of investment is, I can't tell you if it's credible or not. I'm sure it is, but I can't tell you that, and that's the point we're trying to make. We don't have the data to really have this conversation that we need to be having.

Dr Fletcher : On this and your former question: ironically enough, PNG has implemented or is implementing the EITI. Most of the data in our submission actually comes from the PNG EITI figures. They don't have the robust civil society and governance mechanisms to do as much about it as we do here, but they actually have, believe it or not, more information on what's happening with their revenues than we do. We are actually behind PNG when it comes to that. I completely agree with everything that Ms Cato is saying on the data issue.

CHAIR: What about the $12 billion in petroleum resource rent tax paid since 1990? Do you have any concerns about that figure?

Ms Cato : Again, I find it concerning that a company can put out a statement where they've aggregated 27 years of data into one figure and that's allowed to be a credible statement. I'm not saying that they have or haven't paid that, but they could have paid that in the first year and not paid in the last 26 years—who knows?

CHAIR: Sure.

Ms Cato : That's a ridiculous thing to be able to claim, an aggregate figure over almost 30 years, and not to have to detail out by financial year.

CHAIR: It's an impressive-looking figure, but how do we know whether they should be paying more or—

Ms Cato : Exactly. $1.3 billion is impressive from Glencore, but that's not corporate income tax; we know that.

CHAIR: What about on page 2 of the disclosure—it breaks down the excise, GST, parallel tax and employee income tax. Do you think it's fair for Exxon to characterise some of these as taxes that Exxon pays?

Ms Cato : No. As I said, this is why it's not within any other countries' legislation. It's specifically written out that these kinds of taxes are not included in the tax that they have to report. Companies that do report, BHP, Rio and Glencore, report under the mandatory disclosure laws and break it down as they should, but then they also include these kinds of taxes, because they still want to show that. That's fine, but that's not the information we're looking for. As I said, I don't think payroll tax and employee income tax is a reflection on whether a company is contributing for taking our natural resources.

CHAIR: I'm interested in your sense of what sort of company tax Exxon is likely to pay over the next five to 10 years. Do you have a view about that, given that they haven't paid any company tax in the last three years?

Ms Cato : As I said, without disaggregated reporting, I couldn't tell you. If they haven't paid it over the last three years, it would be very unusual that they would pay. I wouldn't expect it.

Dr Fletcher : It is possible—early on in any project there is debt, and debt cuts into profits and that cuts into taxes. As Ms Cato pointed out in her submission, the amount of tax you pay can change for a project year to year. But, as she also said, we have no way of knowing what's going to happen in 2019 or 2020. We have no way of knowing.

Senator HUME: Ms Cato, in your submission you mentioned that Australia ranked eighth overall in the Natural Resource Governance Institute in 2017 with regard to resource governance. That doesn't sound too terrible to me, ranking eighth. Can you explain that to me?

Ms Cato : The reason that's put in there is that, no, it doesn't sound too terrible. I need to clarify that that is just Western Australia. The Natural Resource Governance Institute, NRGI, only looked at Western Australia. Eighth is a fairly good position, and it should be where we are. The reason I raise that is that, when you look at revenue management, we're 32nd, so we drop a significant amount when we're ranked solely on revenue management, and that is based on the things that I've outlined today: we don't have mandatory reporting, we don't have publicly available data, and we're not an EITI country, so we're not any closer to making any of this more transparent.

Senator HUME: How, then, would we rank eighth? There must be significant governance practices in place in order to rank eighth, regardless of revenue management aspects.

Ms Cato : There are, I think, five or six reporting segments. On the others, yes, we rank very high, like 99 or 100.

Senator HUME: And you don't think that that's enough of a safeguard?

Ms Cato : I think if we drop to 32nd on revenue management, which is kind of what we're looking for from our natural resources and why we're discussing and having this inquiry—are we getting enough—

Senator HUME: But tax isn't paid on revenue; it's paid on taxable income.

Ms Cato : But, if we're not able—

Senator HUME: And it doesn't include things like investment.

Ms Cato : But, if we're not able to properly demonstrate that we can follow that trail of money, that's part of the revenue management as well.

Senator HUME: I know that you are in favour of a mandatory disclosure and reporting regime. Do you know what the cost of compliance would be for a mandatory reporting regime?

Ms Cato : I would be able to give that to you, but I don't have it on me now. There are figures—

Senator HUME: Perhaps you could take that on notice.

Ms Cato : I can, yes.

Senator HUME: Where would you get that information?

Ms Cato : The UK has looked at it. The US initially looked at it, but they had a lot of competing ideas about what that would be. Given that the UK is now going into its third round of reporting, I should be able to bring you information on that.

Senator HUME: I just want to comment on a question that was posed to you by the chair, which was about the credibility of investments made in Australia. Are you qualified to make that call on whether the data was there or not? Are you a geologist?

Ms Cato : No, and I shouldn't be sitting there. That's why I'm not talking to you here about the tax regime and stuff. What I am here to talk to you about is having that transparency and that information. If we had that information, you would have someone that's differently qualified to talk about whether those investments were credible, which is why I can't say whether they are or not. So I'm not going to say that. Yes, you're very right, but what I am here to say is that without that data—this is where I'm qualified to speak—you can't have that conversation.

Senator HUME: Do you think that the vast majority of people who are accusing Exxon, Glencore or whoever it might be of aggressive tax minimisation or tax avoidance are qualified to make a call on whether their investments are credible?

Ms Cato : I think it's a really ingenious way for companies to try to continue to not operate in transparency by saying that the average person wouldn't understand what they were releasing if we had this disaggregated data. I think they would. I think the reason why we have such a convoluted conversation at the moment is that we have data that is really highly aggregated or absent. We're trying to compare it to different things, but the ATO itself says, 'Don't compare this data to this,' or, 'This data isn't checked, so we can't verify it.' Then, yes, we are having a conversation where people perhaps aren't qualified because they don't have the information.

Senator HUME: Do you think that, in other organisations that aren't in the extractive industries, we make judgements on the amount of tax paid on the basis of whether investments are credible?

Ms Cato : I can't speak for that, because I'm not in another sector. As I said, I wasn't here arguing that Exxon's investments aren't credible. I'm arguing that I don't believe that they're paying the amount of tax that they should be, but I can't tell you that, because I don't have the legislation required to make them report.

Dr Fletcher : Can I just jump in on that. We all work in this area with geologists. It wouldn't be that hard to ask for expert opinions on the credibility of investments if we had the numbers.

Senator HUME: But why do we need to ask about the credibility of investments?

Dr Fletcher : Because we don't have—

Senator HUME: We don't ask other organisations whether their investments are credible if they make an investment that they can deduct against their taxable income.

Dr Fletcher : As Ms Cato pointed out, the extractive industries are particularly prone to this. That's why we're having this inquiry. We wouldn't be having this inquiry into aggressive tax avoidance, with the particular focus it has, if the extractive industries weren't particularly prone to the sort of thing we're talking about.

Senator HUME: I might direct a question to you, Dr Fletcher, too about PNG's legislative scheme in regards to tax havens and loopholes. How similar is the PNG legislative regime compared to Australia?

Dr Fletcher : It is pretty similar. There are some differences, for example, when it comes to things like royalties. They have a thing called a development levy, which is a separate thing which is supposed to deliver development impacts at the local level. Their royalties regime is quite different but there are a lot of similarities, especially at corporate tax level. I would say there are significant similarities.

Senator HUME: I direct this to both of you. Do you think that today if ExxonMobil came in and laid bare its entire investment book and its accounts in a granular way that that would satisfy you as to whether they had paid an appropriate amount of tax?

Ms Cato : I think it would satisfy me asking for their data. I would not be able to know it would satisfy me if they paid enough tax until I had seen how much tax they paid.

Senator HUME: They have been clear about how much tax they have paid.

Ms Cato : I don't think they have been. I think that's the point of this inquiry—that I don't think they have been.

Senator HUME: At the end of the day, if you found that their submission or any additional information they provided to the committee today was adequate, do you think that you would happily say, 'Fair enough, we were wrong?'

Ms Cato : If we had mandatory disclosure reporting and I could see what Exxon had been paying and it was what they had been stating then yes. I am not here to try and take them down; I am here to make sure that Australians are benefiting from our resources.

Dr Fletcher : Can I add to that. I completely agree with everything that Ms Cato says but there is a step further. If we had more information, if the book was laid bare, as you say, for all of these extractive companies then we could say, 'Okay, that is interesting because, as we suspect and as it seems clear, you made profits of X amount of dollars in this year and yet you paid much less than the 30 per cent company tax we would expect,' and that is an opportunity for Australians to have a conversation. Therefore, everything they are doing is quite likely legal from a technical point of view, but then they are exploiting loopholes in the laws that we can then have a conversation about closing. This is why I mentioned the second of the Tax Justice Network's recommendations, which was to review and reduce the allowable tax concessions both here and overseas. If we do it here, PNG may well follow. That is very important. Ms Cato is absolutely right: that is the first step. But once we've got the open book then we can have a conversation around: do we really think this is a reasonable fair share or not? And that is obviously up to the parliament to decide with input from the Australian public.

Senator HUME: The ATO has dedicated significant resources into investigations of ExxonMobil and also other companies in the extractive industries. Do you think that the ATO's processes are sufficient?

Ms Cato : I wouldn't want to comment on that. I am not sure. I know that for the OECD foreign bribery—I think we had our fourth report released in about December and there are around 20 or so investigations currently being undertaken by the AFP. Thirteen of those are in the extractive sector. So we know that it is happening and it's not public. I would assume that, yes, they are doing that. But they are not there, as Luke said, to say whether or not we are getting a fair go; they are there to see if they are following the laws that we have.

Dr Fletcher : Tax Justice Network is not in the secretariat. I refer to Jason Ward in his testimony on that. He would be more of an expert than I would be to comment.

Senator CAMERON: I'm looking at the OECD aggressive tax planning website. They are pretty clear, even if some of us aren't too clear, that there is a basic erosion in profit shifting going on by multinational corporations. The ExxonMobil tax facts document, have you had a look at that?

Ms Cato : Yes.

Senator CAMERON: It presents this position that everything is going okay. They talk about three per cent being the petroleum resource rent tax. That is the position they put forward there. They indicate that they pay 24 per cent excise taxes. There are a whole range of different taxes that they claim they pay. They claim they've paid $12 billion since 1990. You've been sort of raising this issue of what the economists call information asymmetry. Would that be this situation here—that there's just not enough information to make a proper judgement about how much tax is being paid and whether it meets the appropriate tax requirements of this company?

Ms Cato : Absolutely. That's what my position here is—that without that information we are sort of having a conversation half disclosed and half not.

Senator CAMERON: In the document—what do they call it? They call it ExxonMobil Australia tax facts. In that document they say that they are paying over $2 billion. In an average year, they say, they pay over $2 billion in total taxes. Again this is the sort of thing where they say, 'This is what we're paying in total.' Do you know if that $2 billion includes the PRRT?

Ms Cato : I would have no idea. I don't know what they've included in that $2 billion, which is what I've sort of argued in my submissions and in my evidence today. When any company claims that, you don't know what they're putting into it.

Senator CAMERON: So the PRRT, even though it's called a tax, contains elements that are not about a tax, doesn't it? If you have royalties, as you have in the coal industry and in the minerals industry, those royalties are actually paying for the product that you're extracting from the Australian public, basically. You're paying the Australian government for your raw material. Is that part of the PRRT?

Ms Cato : I'm not too sure of that. You would have to ask someone that's more tax minded. When we've had the EITI in Australia we did a pilot of that. I think that's what you're asking. Yes, you would report on the PRRT separately. Countries can set up the different categories that they report on. As I said, reporting royalties and taxes together is a common tactic to inflate the tax figure. As you're rightly pointing out, the PRRT is this between-royalty tax thing. In the EITI, when we did the pilot in Australia that was a separate reporting category. I would assume that if we had mandatory reporting in Australia that would again be a separate reporting category, so it wouldn't be put into tax or royalty but be its own separate thing.

Senator CAMERON: Just to clarify, the gas is owned by the Australian government and the Australian public and the states. Part of this PRRT is to pay to access that commodity. It's a bit like Bunnings having to pay Ryobi to buy Ryobi drills and sell them on. Would that be a fair analogy?

Ms Cato : The idea of a royalty is that you are paying for the commodity that you are taking that can't be given back. Is that the way that the PRRT was structured to work? I can't really answer that. Is that how it's working? No, I don't think it is.

Senator CAMERON: They've got this other part of the graph which says that 34 per cent of their revenue goes to crude and refined product purchases. Is that where you get this transfer pricing problem that the OECD have identified?

Ms Cato : Yes. I'm not going to say that this is what Exxon is doing because, as I said, I can't tell you what that 34 per cent on a pie graph is. You do get transfer pricing in that area, yes. The OECD is like the BEPS country-by-country reporting which we've signed onto. That's great, but, again, that's not public in Australia. We have started having this information, but I still wouldn't be able to give you that information as a member of the public.

Senator CAMERON: In a previous economics committee that I was on, BHP actually included in their estimate of tax that they paid PAYG tax. They said, 'Well, our employees are paying this tax, so we're paying the tax,' and they added that to the tax take. That's not a proper assessment of company tax, is it?

Ms Cato : No, and I think that's what I was saying: this is what we think companies like Exxon and Glencore are claiming when they claim these highly inflated figures of their contributions. As I said, BHP, because they do report under mandatory disclosures, being dual listed on the London Stock Exchange, will report that disaggregated information. They can then report their PAYG contribution if they like, but we can still see what they've contributed without that.

Senator CAMERON: The impression we got from the deputy chair's questioning was that this is all okay—'Why are you basically coming after us?' That's my impression. So, the aggressive tax planning, even though it's not recognised by the coalition senator, is certainly recognised by the OECD as a problem, isn't it?

Ms Cato : Yes.

Senator CAMERON: And that's why the Australian Taxation Office has had to try to get more transparency.

Ms Cato : That's right. I think the OECD was reporting three that we did, and we got really quite slammed for not having pursued some of these cases, particularly in the extractive sector. I'm not an expert on the OECD side, but there is a reason that this has been an issue globally. And, as I said, there's a reason that 30 countries now have this. A bill was on a second reading in the Ukrainian parliament. Every country that is resource rich has realised that this is an issue and we are losing out, and that you cannot solve it without having all the information in front of you. So, that's where you start—the data.

Senator CAMERON: On the base erosion and profit shifting, which is called the BEPS, there are now 100 countries, according the OECD, trying to cooperate to deal with this issue. So, there'd be a fair bit of effort across the OECD to try to deal with this, so there is an issue there. Nobody could argue that there's not an issue of transfer pricing, and trying to exploit gaps and mismatches in tax rules to artificially shift profits across different areas. Is that correct?

Ms Cato : That's my understanding, yes.

Senator CAMERON: As I understand it, Exxon has subsidiaries in the Bahamas.

Ms Cato : I believe so.

Dr Fletcher : Yes. It's all detailed. It's 134 or something, and it's all detailed in the network matrix on PAYE. They also have subsidiaries in Luxembourg, in Holland and in Delaware, which are also known tax havens—perhaps not as infamous as the Bahamas, but also places where there are these mailbox companies, which have no staff, and there's just a place to basically shift profits so that you pay no tax.

Senator CAMERON: That's where the base erosion takes place, isn't it?

Dr Fletcher : Well, there are two places, we would argue. The first place is in these loopholes, in these tax concessions, that are a problem with government policy. Well, they're both problems with government policy, but that's one problem, which is to close these loopholes and to make it harder to legally avoid tax. The use of tax havens via transfer pricing and profit shifting is a second problem, and I would argue that they're equally important and equally concerning in terms of the amount of revenue lost.

Senator CAMERON: Have you had any discussions with the Australian Taxation Office in relation to the issue of BEPS?

Dr Fletcher : Our partners at Tax Justice Network—this is one of many issues that we work on. We work across the whole spectrum of development in the Asia-Pacific, whereas our friends at Tax Justice Network basically think about tax 24/7. They're the ones who are engaging with the tax office about these sorts of things.

Senator CAMERON: Have you had a look at this voluntary position that's been adopted with the ATO?

Ms Cato : The voluntary tax code?

Senator CAMERON: Yes.

Ms Cato : Yes.

Senator CAMERON: Is that robust enough, in your view?

Ms Cato : No. The Exxon fact sheet that you're looking through is their voluntary tax code contribution.

Senator CAMERON: Oh, that's it?

Ms Cato : That's it. It's a PDF with some pie graphs, and most of them that are put up there, you open it up and it's an Excel spreadsheet, but it actually just links you to PDFs that companies have provided. I think within my submission I point out how many companies have actually made submissions to it, but it's gone down. So, there have been two years, and I think it was about 58 companies that reported the first year, and it went down to about 54 the second year. People aren't taking it up, and it gives you no information that is new or disaggregated.

Senator CAMERON: So, in the fact sheet they say 'over the last four years the vast majority'—it doesn't say all of their approaches, but it says the vast majority—'of international related party dealings were with affiliates in Singapore, the US and PNG. It says that these dealings are predominantly for the sale and purchase of refined products and raw materials, the provision or receipt of services and the cost of financing. That really doesn't tell you anything about international related party dealings, does it?

Ms Cato : No.

Senator CAMERON: It doesn't tell you what's been done in the Bahamas. It doesn't do any of that, does it?

Ms Cato : No. And that document that you are looking at is enough to make them compliant with a voluntary tax code. So, they can put on their website that they participate in it and they are compliant with it. And the ATO points out that it does not review or provide any assurance on the accuracy of the data that the companies put out. So, no-one's checking this.

Dr Fletcher : And perhaps I could just say that the Bahamas is not the only place in the world where you're allowed to buy and sell petroleum products. You can do it in many other countries. So, the idea that you need to have a company in the Bahamas to buy and sell petroleum or do other financial transactions is obviously ludicrous.

Senator CAMERON: There must be a reason. You don't know what the reason is—

Dr Fletcher : We don't know what the reason is, but we question whether you need to have all these companies.

Senator KITCHING: What's the main reason a company might base itself—

Dr Fletcher : It is because there's zero company tax.

Senator KITCHING: Thank you.

Senator CAMERON: Are you guys the right people to talk to about the PRRT?

Ms Cato : No. Talk to the Tax Justice Network.

Senator KITCHING: Going back to PNG, post the earthquake last month, there have been some calls that perhaps an inquiry into the aftermath of the earthquake. I'm interested in that, because I note that the Leader of the Opposition sent a letter to Mr Owen talking about the social licence under which Exxon particularly operates in Australia. Could we have, very briefly, I guess the social licence under which they're operating in PNG? That may be informative about the social licence under which they're operating in Australia.

Dr Fletcher : Just for the record, we wrote an 80,000-word report on the PNG LNG project in 2012 and the problems that we were expecting to come from that. We predicted that the government did not have the capacity to handle either the national or the local revenues, and we also predicted major strife with the landowners around competition for and disagreements about access to the royalties and that it would be a disaster. Those predictions have come true. What we didn't predict is the extent of the tax avoidance that would happen and therefore the lack of revenue that have come in that has contributed to this financial crisis. So, when you talk about the social licence to operate, we would argue that it's not just the fact that the companies are not paying anywhere near the tax and the other revenues that were expected and predicted. But there are a whole lot of issues around the way that they force themselves into this community and the concessions that they got from the government to extract this gas from a country that was not prepared and ready for it, and that's why we're now seeing problems.

In terms of the earthquake, I think you'll find that it's unlikely that it's due to the project. But people in the highlands are so upset about what's happened and the lack of development there that they are blaming the company, without any evidence, for the earthquake, and this may very well set of further conflict. There's already been violence and deaths, and it could escalate. And the problem has got to do with exactly what you're talking about—the lack of social licence to operate. And the Exxon subsidiary Oil Search, even though it's listed in PNG, is mainly an Australian company in reality. A lot of the staff are based in Sydney. And ExxonMobil's operations there also have operations out of Brisbane. So, this is as much an Australian problem as it is a PNG problem—not to mention the fact that the taxpayer is lending to it.

Senator KITCHING: So, the PNG subsidiary is really run out of Sydney. Is that correct?

Dr Fletcher : Exxon is run out of Brisbane. The part of the ExxonMobil operations that are doing the PNG LNG project has operations in Brisbane. Oil Search is a different story. Before gas, it had oilfields—it has oilfields—in PNG, and it is equally based in Moresby and Sydney. So, it has a huge staff.

Senator KITCHING: Is the corporations law of PNG based, as other legislation, on the Australian—

Dr Fletcher : My understanding is that the tax code is very similar to the Australian one.

Senator KITCHING: So, where would the controlling mind, if I can use the term that's developed in case law, be? Where is the controlling mind of the PNG subsidiary? Is that in Port Moresby? Or is it in Sydney?

Dr Fletcher : That's a good question. I could only speculate on that. I would probably guess that they were in the Brisbane and Sydney offices of Exxon and Oil Search, but I don't know, really.

Senator KITCHING: Well, maybe when Exxon comes we can ask them to clarify.

CHAIR: Thank you, Dr Fletcher and Ms Cato.