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How Chevron, Exxon and Shell Will Be Impacted By Australian Tax Legislation

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By: MICHEAL KAUFMAN: Aug 17, 2015

In the past, Chevron Corporation (NYSE:CVX), Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell plc. (ADR) (NYSE:RDS.A) have managed to charge high interest rates from their Australian subsidiaries for the funding of their $54 billion Gorgon project. The high interest payments allowed the oil majors to enjoy massive tax-free profits. However, the Australian Senate is now working on ways to reform the corporate structure and prevent the massive flight of capital from Australia to other countries.

Chevron, Exxon and Shell have loaned their Australian subsidiaries $66 billion and has charged $3.1 billion in interest payments during 2014. The interest rates charged by the lenders mainly depend upon the leverage of the company. The more the company is leveraged, the higher the interest rates charged due to higher default risk.

The Australian subsidiaries for example are highly leveraged when compared to their parent companies. The debt to equity ratio of Chevron Australia stands at 76.2%, compared to the debt to equity ratio of Chevron of around 8.5% only. The new legislation would now force companies such as Chevron to fund interest payments from its subsidiaries based on the debt to equity ratio of their global operations.

Under the reform, the amount of Chevron Australia’s loans will fall from $36 billion to $4 billion. Similarly, the interest expense for Chevron Australia would also decline from $1.8 billion to $205 million. The Australian subsidiaries for Shell and Exxon would experience similar declines in their debt amounts. The overall debt for the Australian subsidiaries will fall from $3.1 billion to $462 million. Interest in the balance sheet comes before profits, thus higher interest charges would mean that these subsidiaries would pay lower taxes. With this reform, the Australian Senate will be able to charge higher taxes.

The reform is likely to face opposition from the oil majors, as it would mark a serious decline in tax free profits. The reforms would also come at a time when oil majors are battered with more than 50% decline in crude oil prices. The upstream segment profit margins are seriously impacted by the decline in prices, and seriously weighed on the second-quarter fiscal year 2015 earnings result.

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