The US Has Gone From Trailblazer to Straggler in Promoting Transparency – What Does This Mean for the Oil Market?

Heba Abou-El-Sood, Cairo University Faculty of Commerce and Marwan Izzeldin,  Lancaster University Management School (UK)

Last month, the president of the US signed a major law, or rather a major gift for the oil and gas lobbyists, repealing a regulation on mandatory disclosure of payments oil and mining companies made to foreign governments for the right to extract resources. The regulation, passed by the SEC, required oil, gas, and mining companies listed on the U.S. stock exchange to report taxes, license fees, production entitlements, royalties, bonuses, and other benefits, paid to any government. The reporting had to be done on a country-by-country and project-by-project basis.

Now oil tycoons like ExxonMobil, Chevron, or API will not have to disclose payments made to foreign governments while chasing the deals for extractives around the world. The big players in the US were lobbying to require the disclosure not “so granular as to reveal proprietary commercial information” and at only region-by-region level. They argued that the regulation has been putting unreasonably huge compliance burden on American energy companies, putting them at a competitive disadvantage relative to their foreign competitors in Russia and China. Tillerson, former CEO of ExxonMobil now Trump’s secretary of state, fiercely lobbied against the anti-corruption rule, but lost the battle against fairness and transparency. The regulation was mandated via the Dodd-Frank Act in 2010 in the aftermath of the financial crisis. The aim was to cut down on corruption in resource-rich developing countries by enhancing transparency. This major step infused global and European transparency reforms in the aftermath of a tough period.

The repeal of the mandatory disclosure rule will be a major setback to transparency, which shall benefit, the not-so-small as claimed, large American extractives corporations operating in countries where government revenue disclosure is weak. The US lobbyists’ claim of impairing competitiveness is mocked after EU-listed counterparts have disclosed payments in resource-rich countries and remained competitive without causing costly measures or expunging integrity. In 2016, ExxonMobil was under investigation by Nigeria’s economic and financial crimes commission over lucrative oil-extracting rights it secured back in 2009 by beating out its Chinese rival. Revelations about this investigation came at a sensitive moment for the oil industry, when the SEC regulation was putting US as trailblazer to promote transparency around the world. It’s not the first time ExxonMobil sought to hide information. The company came under fire in 2015 for not releasing its U.S. tax data to the Extractive Industries Transparency Initiative (EITI), a global corruption watchdog entity promoting transparency in resource-rich countries.

Energy reserves are generally considered a burden for poor and developing countries, leading to wasteful spending, fraud, and instability.  The goal of the SEC regulation was to prevent corruption in developing countries, where top officials might get lucrative benefits and leave their countries destitute. Moreover, overcoming corruption and fraud in these countries promoted the US policy goals of poverty elimination, good governance, and economic growth and stability. Disclosure and transparency are also crucial to the companies releasing information. The IMF forthcoming staff research shows that greater transparency is linked to lower sovereign bond spreads in South America, Asia, and the Middle East. After the US anti-corruption rule lift, European companies and those in emerging markets will not be at an equal-playing field with the American counterparts as claimed. The lift also raises questions on what the American oil major players are trying to hide or whether they are trying to find a legit way of tax avoidance.

The OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) requires enhanced transparency for tax purposes for multinational enterprises (MNEs), which use transfer pricing and are located in the EU or with operations in the EU. The action plan mandates that MNEs file country-by-country (CbC) reports as of December 31, 2017. CbC reports shall include information for every tax jurisdiction in which the MNE group operates on: total revenue, before-tax profit, income tax paid and accrued, number of employees, total capital, retained earnings, and total tangible assets.

However, with the signing of the new US law permitting hiding payments to governments, questions have arisen on whether US-headquartered MNEs will still disclose such information and whether the Internal Revenue Service (IRS) may still hold them accountable. The EU-based MNEs shall be at a disadvantage and the whole global disclosure initiative shall experience a major relapse.

An EU commission proposal has been introduced to extend the public reporting requirements to more MNEs to include relatively smaller MNEs and to require disclosure on worldwide activities in all tax jurisdictions, not just in EU member states or non-EU countries considered to be tax havens. Parallel to that, after EU-Brexit referendum, the UK parliament pushed through similar amendments to enhance transparency and not to put U.K.-headquartered MNEs at a reputational disadvantage. Having had the US regulation pulled back, the US will be out of sync with the global transparency standards already in use in Europe and Canada. Because ExxonMobil, API, and Chevron are not listed on the European exchanges, they don’t have to comply with the EU disclosure rules, which will give them a competitive edge relative to their counterparts. Attempting to legitimizing tax evasion and avoidance through the regulation repeal may eventually have unforeseen negative signaling effect to US companies.

Heba Abou-El-Sood, Cairo University Faculty of Commerce and Marwan Izzeldin,  Lancaster University Management School (UK)

Last month, the president of the US signed a major law, or rather a major gift for the oil and gas lobbyists, repealing a regulation on mandatory disclosure of payments oil and mining companies made to foreign governments for the right to extract resources. The regulation, passed by the SEC, required oil, gas, and mining companies listed on the U.S. stock exchange to report taxes, license fees, production entitlements, royalties, bonuses, and other benefits, paid to any government. The reporting had to be done on a country-by-country and project-by-project basis.

Now oil tycoons like ExxonMobil, Chevron, or API will not have to disclose payments made to foreign governments while chasing the deals for extractives around the world. The big players in the US were lobbying to require the disclosure not “so granular as to reveal proprietary commercial information” and at only region-by-region level. They argued that the regulation has been putting unreasonably huge compliance burden on American energy companies, putting them at a competitive disadvantage relative to their foreign competitors in Russia and China. Tillerson, former CEO of ExxonMobil now Trump’s secretary of state, fiercely lobbied against the anti-corruption rule, but lost the battle against fairness and transparency. The regulation was mandated via the Dodd-Frank Act in 2010 in the aftermath of the financial crisis. The aim was to cut down on corruption in resource-rich developing countries by enhancing transparency. This major step infused global and European transparency reforms in the aftermath of a tough period.

The repeal of the mandatory disclosure rule will be a major setback to transparency, which shall benefit, the not-so-small as claimed, large American extractives corporations operating in countries where government revenue disclosure is weak. The US lobbyists’ claim of impairing competitiveness is mocked after EU-listed counterparts have disclosed payments in resource-rich countries and remained competitive without causing costly measures or expunging integrity. In 2016, ExxonMobil was under investigation by Nigeria’s economic and financial crimes commission over lucrative oil-extracting rights it secured back in 2009 by beating out its Chinese rival. Revelations about this investigation came at a sensitive moment for the oil industry, when the SEC regulation was putting US as trailblazer to promote transparency around the world. It’s not the first time ExxonMobil sought to hide information. The company came under fire in 2015 for not releasing its U.S. tax data to the Extractive Industries Transparency Initiative (EITI), a global corruption watchdog entity promoting transparency in resource-rich countries.

Energy reserves are generally considered a burden for poor and developing countries, leading to wasteful spending, fraud, and instability.  The goal of the SEC regulation was to prevent corruption in developing countries, where top officials might get lucrative benefits and leave their countries destitute. Moreover, overcoming corruption and fraud in these countries promoted the US policy goals of poverty elimination, good governance, and economic growth and stability. Disclosure and transparency are also crucial to the companies releasing information. The IMF forthcoming staff research shows that greater transparency is linked to lower sovereign bond spreads in South America, Asia, and the Middle East. After the US anti-corruption rule lift, European companies and those in emerging markets will not be at an equal-playing field with the American counterparts as claimed. The lift also raises questions on what the American oil major players are trying to hide or whether they are trying to find a legit way of tax avoidance.

The OECD’s Action Plan on Base Erosion and Profit Shifting (BEPS) requires enhanced transparency for tax purposes for multinational enterprises (MNEs), which use transfer pricing and are located in the EU or with operations in the EU. The action plan mandates that MNEs file country-by-country (CbC) reports as of December 31, 2017. CbC reports shall include information for every tax jurisdiction in which the MNE group operates on: total revenue, before-tax profit, income tax paid and accrued, number of employees, total capital, retained earnings, and total tangible assets.

However, with the signing of the new US law permitting hiding payments to governments, questions have arisen on whether US-headquartered MNEs will still disclose such information and whether the Internal Revenue Service (IRS) may still hold them accountable. The EU-based MNEs shall be at a disadvantage and the whole global disclosure initiative shall experience a major relapse.

An EU commission proposal has been introduced to extend the public reporting requirements to more MNEs to include relatively smaller MNEs and to require disclosure on worldwide activities in all tax jurisdictions, not just in EU member states or non-EU countries considered to be tax havens. Parallel to that, after EU-Brexit referendum, the UK parliament pushed through similar amendments to enhance transparency and not to put U.K.-headquartered MNEs at a reputational disadvantage. Having had the US regulation pulled back, the US will be out of sync with the global transparency standards already in use in Europe and Canada. Because ExxonMobil, API, and Chevron are not listed on the European exchanges, they don’t have to comply with the EU disclosure rules, which will give them a competitive edge relative to their counterparts. Attempting to legitimizing tax evasion and avoidance through the regulation repeal may eventually have unforeseen negative signaling effect to US companies.