The introduction in 2016 of significant international fiscal reforms has led to a notable decline in income-shifting activities by oil and gas companies. The enhanced transparency requirements of the OECD’s Base Erosion and Profit Shifting (BEPS) initiative and the EU’s Anti-Tax Avoidance Directive have increased the costs and risks associated with aggressive corporate tax planning, reducing its attractiveness.
However, while such global tax reforms have made progress in curbing aggressive tax planning in the energy sector, national policies still play a pivotal role in shaping corporate behaviour, according to our research. Country-specific fiscal tools – in particular, fossil fuel subsidies and dividend withholding taxes – also exert a major influence on business decision-making.
Subsidy effect
The oil and gas industry is central to the global economy, profoundly impacting public finances, energy security and environmental policy. Despite coming under increasing scrutiny and pressure to reduce fossil fuel dependency, the sector remains a significant source of government revenue worldwide. In resource-rich countries such as Norway, Saudi Arabia and Venezuela, oil receipts make up more than 50% of total government income.
With a reduction in fossil fuel production (as a result of international commitments to cut greenhouse gas emissions by 80% by 2050) undermining fiscal revenues, governments may be induced to shy away from stricter environmental policies or even introduce subsidies or tax incentives that dilute climate goals.
Fossil fuel subsidies remain substantial globally, having risen from US$4.7 trillion in 2015 to US$5.9 trillion in 2020. These subsidies, which represent around 7% of global GDP, reduce effective tax rates and alter companies’ incentives.
There are lower levels of income shifting in subsidy-rich environments
Data from our research shows that in countries with high government subsidies, companies engage in less income shifting. This finding aligns with economic intuition: when companies already benefit from favourable treatment, they have less to gain from shifting profits elsewhere.
Conversely, higher dividend withholding taxes are associated with greater income shifting. These taxes, levied on payments to non-resident shareholders, create a drag on after-tax returns. Companies appear to respond by reallocating profits away from jurisdictions with high withholding rates. It is behaviour that mirrors findings from other studies, where businesses structure operations so as to optimise their global tax burden.
Our research has found that companies adjust their strategies dynamically. Although income shifting declined after 2016, especially in jurisdictions that implemented BEPS measures, there were lower levels of shifting in subsidy-rich environments, while high withholding tax regimes experienced increased outbound profit flows.
Together, these findings show that companies are responsive to both the carrot and stick of tax policy.
What works
The research results offer three key insights for governments and international bodies:
- International coordination is effective. The significant drop in income shifting after the 2016 reforms highlights the power of multilateral tax initiatives. Broad adoption and consistent enforcement remain crucial to ensure that reforms achieve their goals.
- Local incentives matter. Governments should be aware that subsidies and withholding taxes influence corporate behaviour. Aligning these instruments with environmental and fiscal objectives can help manage unintended consequences.
- Flexibility is key. As oil prices fluctuate and regulatory landscapes evolve, companies will continue to adapt. Policymakers must remain vigilant and flexible, updating tax policies to keep pace with corporate strategies.
Our study underscores the importance of understanding how corporate behaviour is explained by structural tax variables, rather than only backward-looking metrics. As international tax policy continues to evolve, such insights are essential to designing effective and equitable fiscal regimes. For the oil and gas sector, which sits at the nexus of energy, environment and economics, getting national tax policy right is more important than ever.
More information
Read the full research report
