Oil trading is a very profitable business. If you manage to pay no taxes on it and can work from a Caribbean beach, well, then it's corporate heaven.
Royal Dutch Shell Plc, Europe's largest energy company by market value, has managed to tick all the boxes: It has a very profitable trading subsidiary, which pays not a single cent in taxes, in Nassau, the capital of the Bahamas. The little-known entity is called Shell Western Supply and Trading Ltd., a trading outfit dealing in crude from West African and Latin American countries. It's a cog in the huge trading operation inside Shell that many shareholders pay little attention to.
According to its latest annual tax contribution report, released last month, Shell's Bahamas subsidiary generated more than $652 million in profits in 2020, making the Caribbean country its 5th most profitable operation globally. More remarkably, Shell achieved excellent returns employing just 35 people in Nassau. Its staff worldwide numbers 87,000.
The year 2020 wasn't an anomaly. During the 2018 to 2020 period, the oil major made almost $2.5 billion in profits with the Bahamas subsidiary — a staggering 14% of the parent company's total net income over those three years.
The tax regimen is completely legal under Bahamian law. And Shell executives offer a lengthy list of "commercial" reasons why it makes sense the subsidiary should be based in the Caribbean nation. Among them: geographical proximity to West Africa and Latin America, the high standard of living unavailable elsewhere in the region, great transport links, and the fact that Shell has had a presence in the island since 1982.
Here are a couple of counterarguments. While it is true that Shell has been present in the Bahamas for over 40 years, the trading subsidiary only relocated there in 2018 (from Barbados, another tax friendly Caribbean outpost). Shell might have considered Houston, where it already had a giant trading business. True, the Bahamas has a high quality of living – but so does Houston, unless white-sand beaches are a prerequisite for successful oil trading.
As for those transportation links, how many direct flights per week are there from Nassau to Latin America and West Africa? Just one, to Panama, according to a simple Google search. West Africa is also closer to London than to the Bahamas.
So that leaves taxes. The Covid-19 pandemic made 2020 an odd year for everyone, including Shell, to fulfil their fiduciary responsibility to achieve the highest returns for their shareholders. Still, the oil giant demonstrated an ability to channel profits where taxes are lower. The Bahamas wasn't the only low-tax jurisdiction cited in the 2020 tax report. In the ranking of Shell's five top countries by pretax profit, the company listed Switzerland, Singapore and the United Arab Emirates. Many of the loopholes that made the Caribbean synonymous with tax shelters have been shut in recent years. But there are still plenty, and Shell is profiting from one.
The situation may change from 2023 onward when a global deal to set a minimum corporation tax level of 15% may come into force. The Commonwealth of the Bahamas signed on to the agreement in October. As global tax pressure increases, the advantageous rates those nations offer will come under pressure. Net profit is all but sure to drop as taxes rise.
The UK government is already under pressure to impose heavier levies on energy producers, in part because they have profited from rising prices for the oil and gas they pump. British lawmakers may choose to look at oil trading, too.
Shell's shareholders have not asked many questions about taxes. They should.
Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. He previously was commodities editor at the Financial Times and is the coauthor of "The World for Sale: Money, Power, and the Traders Who Barter the Earth's Resources."
Disclaimer: This article first appeared on Foreign Policy, and is published by special syndication arrangement.