So, Cambo. A big oilfield off Scotland which a private equity-backed firm called Siccar Point Energy wants to exploit in partnership with Shell, at a time when energy experts are warning that the world’s fossil fuel emissions need to be cut sharply and fast.
Sky News reported this week that Siccar Point Energy “is not forecasted to pay taxes for many years” because of very favourable UK tax rules for new investments, losses and the decommissioning of oil rigs.
Siccar Point Energy told Sky News in response that the group “is subject to full UK taxation, and taxes will be paid when they fall due.”
There’s some more to see here. My reading of the accounts of some of Siccar Point Energy’s companies is that the group also seems to be using the tax haven of Luxembourg in ways which might cause the UK to forego tens of millions of pounds in tax revenues.
(Update: when I posted this last week I forgot to mention that Scotland’s The Ferret had reported in August that Siccar Point Energy uses Luxembourg. What’s new is my detailed take on what the group seems to be doing there. Apologies to the Ferret – I’ve added a link to their story in the paragraph above)
I put all this to Siccar Point Energy, both directly and via their PR firm, and asked them to comment. They haven’t got back to me but I’ll update this post if they do. In the meantime, I should point out that there’s no suggestion of the group doing anything illegal. This is a problem of terrible government policy, not crime, as we’ll see.
To understand what seems to be going on, you’ll have to take a walk through the dense forest of corporate tax law with me as your more boring version of Virgil.
It will help to keep the key point in mind: that for all the urgent speeches by government ministers about tackling climate change, the UK’s tax regime still makes it attractive for companies to make new investments in an activity which is in danger of wrecking our civilisation.
A company in Luxembourg …
The Siccar Point Energy group has six companies in the UK. All of them are directly or indirectly owned by a company in Luxembourg which, as of 2019, had one employee.
Siccar Point Energy’s ultimate owners are two investment funds, one based in the US and one in the UK. So why does the ownership run through Luxembourg? There’s no oil in Luxembourg and I can’t see any obvious commercial reason for the group to be there.
The most obvious explanation is that the owners of Siccar Point Energy are hoping to avoid some tax on their future profits by channelling their investment through a tax haven.
I put this to Siccar Point Energy and asked them to comment on it, and I didn’t get a response. But the use of Luxembourg and similar tax havens is so common that it’s more or less hard-wired into the practices of many financial institutions, as I’ve written before in relation to a big British bank.
We aren’t talking about profits from Cambo at the moment because there aren’t any yet, though Siccar Point Energy has said in the past that it hopes to sell part of its stake in Cambo soon. The group is reporting pre-tax losses at the moment on its other investments in the North Sea, but evidently its investors hope to make profits in future.
… and a very large loan …
The 2020 accounts of Siccar Point Energy Finance Limited, one of the six UK companies, show a US$679.2 million borrowing from its parent company in Luxembourg. (It’s here, Note 9, if you want to look.)
The obvious question is: since the borrower and the ultimate owners of the group aren’t in Luxembourg, why is the loan being made from there? Let’s have a closer look.
The borrowing takes the form of “listed loan notes” which the UK company has issued to its Luxembourg parent company. The loan notes are due at various dates in the 2040s and pay interest at an annual rate of 8.2 per cent.
The interest has been accrued by the UK company – meaning that it hasn’t been paid to Luxembourg yet – and amounted to US$258 million at the end of 2020. Now that we’re in November 2021, that number is likely to be bigger.
When might this massive pile of interest be paid up to Luxembourg? That’s up to the owners of Siccar Point Energy, who control both parties. But if the loan notes are an internal borrowing within the group, then why are they listed on a stock exchange?
Well, it’s not just any stock exchange. It’s The International Stock Exchange (TISE), which is headquartered in the tax haven of Guernsey. Why would a big company list a security in the tiny Channel Islands rather than in London, Paris or New York? Good question.
When a UK company pays interest to an overseas lender, the UK normally charges a withholding tax of 20 per cent on the interest payment. There is a list of exceptions, one of which is that the loan is in the form of a security listed on a recognised stock exchange.
TISE advertises, as one of its advantages for investors, that the UK considers it to be a “recognised stock exchange” for the purposes of this tax break, which is known as the “quoted Eurobond exemption”. This is a well-known loophole which tax justice campaigners have argued against for years.
So it looks to me as if Siccar Point Energy may have listed the loan notes in Guernsey so as to access this exemption and not have to pay the UK withholding tax in future, when the massive pile of interest is paid by the UK company to its parent in Luxembourg.
It’s hard to see why else the group would list an internal borrowing on TISE. Again, I put this to Siccar Point Energy and haven’t so far received a reply. If they have another explanation then I’d be interested to hear it.
There isn’t anything cunning or secretive going on here, let alone anything illegal. Siccar Point Energy seems to be exploiting a recognised feature of UK tax law which should have been reformed a long time ago and hasn’t been.
And if I’m right, then there’s a lot of money at stake. A twenty per cent tax on US$258 million would raise US$52 million and that figure is only going to grow as long as the notes are outstanding and continue to accrue interest.
… and big PECs.
There’s more still. The accounts of the Luxembourg company, Siccar Point Energy Luxembourg SCA, say it has raised US$679 million from “some of its shareholders” by issuing what are called Preferential Equity Certificates (PEC).
(Luxembourg is more transparent than it used to be and you can access the accounts here.)
The PECs accrue interest at 8 per cent and by the end of 2020 the “outstanding interest payable” on them was US$250.8 million. The terms of this financing, and the size of the pile of interest, are almost identical to those of the “loan notes” issued to the Luxembourg company by Siccar Point Energy Finance in the UK.
In short, this looks like a back-to-back financing of the UK business by some of its investors, which has been run through Luxembourg for the usual reason that very rich people and corporations use tax havens – with the aim of paying less tax somewhere else.
I put this to Siccar Point Energy but, as noted, no reply so far.
According to a law firm which advises investors on using tax havens, PECs are “designed to be regarded as debt at the level of a Luxembourg issuer from a Luxembourg tax perspective whilst in some cases as equity for foreign tax purposes (notably for the US).” And, the law firm adds, there’s generally no Luxembourg withholding tax to pay either.
This is what’s known as a “hybrid financial instrument”, which has been designed to exploit gaps in the ways that different countries tax debt and equity (shares) so as to avoid tax. Here’s a very short video from the OECD explaining how this works.
Anyway, the result could be that Siccar Point Energy’s Luxembourg company gets a tax deduction on the cost of paying interest on the PECs, reducing any tax bill in Luxembourg, while the owners of the PECs who receive the money may not have to pay tax either on any profits they make.
I can’t hope to guess how much tax revenue might possibly be foregone by all this, by which countries exactly and when. But the size of the numbers suggests that the public revenue cost is potentially very big, besides the UK domestic tax breaks which Sky News has reported on.
All other things being equal, an investment will be more attractive to an investor if they expect to pay less tax on their profits in future. Which is a very big problem when we’re talking about a type of investment – oil and gas extraction – which needs to stop ASAP.
So at the same time as the UK is trying to corral the world at COP26 into doing more against climate change, the UK’s tax regime and its interaction with Luxembourg’s seems to be making it attractive for investors to produce yet more fossil fuels in the North Sea.
To say this isn’t in the public interest is putting it very, very mildly.
Some background on me.
I’ve been a board member of the Extractive Industries Transparency Initiative, on behalf of Global Witness; a member of the European Commission’s Tax Good Governance Programme, representing ActionAid; and a member of the steering group of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), also representing ActionAid. I blog about tax issues from time to time because there’s a public interest in these issues being discussed.