By William Hederman. On RTÉ’s Frontline last night, I raised the question of the very low projected tax take from the Corrib Gas project. This issue is sometimes misunderstood. An example comes in this comment sent to me today by one of the other contributors to the programme, Tony Allwright. You can read my response below. (Incidentally, there were numerous pro-industry myths aired on the programme, which I hope to address in a further post very soon.)
From Tony Allwright:
Just a small point. You criticised the fact that Shell in Corrib will pay tax only on its profits not revenue. First, Shell’s Corporation Tax will be 25% compared with 12½% for every other business in Ireland. Secondly, Corporation Tax is statutorily structured to be levied on profit not revenue. So your complaint made no sense.
Tony, my point certainly does make sense and is crucial to the debate about Ireland’s licensing terms. Your comment betrays a poor grasp of the issue. Either you don’t understand the basic problem – or else you are pretending not to understand it.
To compare the 25% tax rate to the 12.5% rate for other corporations is either highly disingenuous or ludicrously simplistic. Oil companies will pay this 25% tax on profits they make from selling oil or gas from Irish fields, having been handed full ownership and control of those resources by the State: the State extracts no royalties and takes no share. If the company chooses to supply the Irish market, these profits are made by selling this Irish oil or gas to Irish consumers at the full international market rate.
The 12.5% general corporation tax rate in Ireland may be objectionably low, but at least the companies to which it applies have not had ownership and control of valuable Irish resources transferred to them in full. Your comparison is a fatuous one.
This tax rate for oil and gas extraction is the only revenue the State will earn from Irish resources. In this context, a 25% tax rate is exceptionally low.
But the really important point is this: because our licensing terms were drawn up under the watch of Fianna Fáil ministers Ray Burke and Bertie Ahern two decades ago (following intensive lobbying by the oil industry), they are structured in a way that allows the companies extraordinarily generous tax write-offs: a 100% tax write-off up front of all exploration and developments costs extending back to 25 years before the field goes into production, including the costs of all the other unsuccessful wells the company has drilled in Irish waters; the cost of dismantling the project; and costs incurred in other countries (what hope is there that the Irish tax authorities will be able to keep tabs on which costs really are connected to the Irish oil or gas project?). At the end of the day, the declared profits will bear very little relation to the true profits.
This is something respected economist Colm Rapple has warned about for years. He explains it better than I can – see his website.
Corrib will be the first example of a field extracted under the Burke-Ahern terms. So, what people in Ireland need to know when assessing the appropriateness of our licensing regime is this: after a company has sold gas or oil it was gifted by the State, what proportion of that revenue will return to the Irish exchequer?
If it’s a very small proportion, then most sensible people would conclude that either the resource should be left in the ground or else a new method of extracting revenue from the company should be implemented. So, just how small is that return?
The former head of the Corrib Gas project, Brian O’Cathain (who also spoke on last night’s Frontline), inadvertently revealed (in December 2010) that in the case of the Corrib field, the return would have been just €340 million, even if the gas had started flowing in 2005 (i.e. that low return is not an effect of the long delays to the project). €340 million is a pittance. It is an insult to Ireland.
This figure was contained in a consultants’ study for Shell in 2003. O’Cathain would not reveal what the projected gross revenue figure was in the study. To reveal this would expose just how minuscule the State’s take is as a proportion of the revenue the company earns by selling Ireland’s gas. Obviously, the declared profits in this projection must have been €1.36 billion – the €340 million tax take is 25% of that.
Just five years later, in 2008, the Government gave €9.5 billion as the projected total revenue figure for Corrib, with a projected tax take of €1.7 billion. That is a state take of 18% of revenue (obviously the Government would want to give an optimistic figure for tax take). Even if the applicable gas price had doubled in the five years from 2003 to 2008 (Bord Gais told me that it may have almost doubled), then the 2003 study for Shell projects Corrib paying just 7% of revenue back to the State.
The above is all detailed in this article on my website.
And remember, this pitiful tax take is the only thing Ireland is guaranteed to get in return for this giveaway. Ireland gets no security of supply. In the case of Corrib, we got some short term jobs. In future projects, such as the Dalkey Prospect, Ireland might get no jobs, no infrastructure and no supply to the Irish market: more on that here.