Chevron: A hornswoggler of the highest order

Unlike a Shell, a Caltex or a BP, Chevron is hardly a household name in this country. It soon will be though. 

The United States oil giant has splashed a bit of cash among a few charities and community endeavours of late, and you may have noticed big billboards with the moniker, "The Power of Human Energy". That's them.

You are more likely, however, to establish the true nature of a multinational corporation by the things it tries to hide, than the things it tells you. On this basis, Chevron – were it to be honest about itself – ought to refashion its logo to "The Power of Hornswoggling".

The term "to hornswoggle" derives from the nickname of professional dwarf wrestler Dylan Mark Posti, who was skilled in hoodwinking his opponents.

Chevron is no dwarf but it is a past master nonetheless in bamboozling its adversaries, the Australian Taxation Office for instance, which is now mired in a tortuous high-stakes court battle with this slippery corporate character over transfer pricing.

Let's get down to business then.

Chevron sold its $4.6 billion stake in Caltex Australia in March, in the biggest block trade in sharemarket history. It is not getting smaller though; rather it has flipped its downstream petrol business and is slated to emerge as the largest upstream oil and gas player in Australia. Its leviathan oil and gas projects, Gorgon and Wheatstone – $30 billion worth – come on stream later this year and next.

The financial statements for Chevron Australia Holdings, which you can purchase from ASIC at a price, exhibit hornswoggling of the highest order. For start, they report in Australian dollars, which is not Chevron's functional currency but probably helps to ratchet up the cost of related-party loans.

In the manner of the Minerals Council and Deloitte Access Economics, they also conflate taxes with royalties and fail to break down the two, as required by accounting standards, and therefore the Corporations Act.

Yet the piece de resistance is "debt push-down". This is a tactic deployed by many multinationals to load up their subsidiaries in higher-tax countries such as Australia with costs (usually high borrowings) in order to reduce profits – and therefore tax obligations – while siphoning off interest payments on these onerous loans to the parent company.

Chevron is the quintessential culprit when it comes to debt push-down.

The accounts of Chevron Corporation in the US for 2012, 2013 and 2014 show interest expense (after tax) was zero, yes zero. Interest capitalised in 2012 for the whole group was $US242 million. The gross amount of interest paid before tax does not appear to have been disclosed separately.

By comparison, Chevron Australia was charged a total of $975 million (before tax) in 2012. Some of this was capitalised into Australian assets under construction and probably accounts for a large part of the $US242 million.

However, it seems the rest cost Chevron nothing because the value of tax deductions on interest from Australia, and its subsidiaries in other countries to which it has so kindly lent, has exceeded the gross interest Chevron Corp treasury paid to all  its third-party lenders and expensed in the income statement.

Chevron appears to be merrily making after-tax net profits from lending to its subsidiaries. Put another way, it is getting foreign taxpayers to pay for its third-party loans. There is $15 billion in related-party loans.

In contrast to Chevron Corp's gearing of 8.2 per cent, the gearing of Chevron Australia is a whacking 60 per cent. Its rival Shell pulls off the same hornswoggle, bulking up its upstream business here, Shell Energy – which also has North West Shelf assets – with debt while its Anglo-Dutch parent has far lower leverage. But it is not even in the same league as Chevron.

With just three days until Treasurer Joe Hockey hands down the federal budget, it is worth reminding retirees and others who stand to have their benefits cut that if hornswogglers such as Chevron paid their fair share of tax in this country, Australia could eliminate the encroaching threat to government revenues from multinational tax avoiders.

It is a good thing the Tax Office urged government this week to improve the transparency regime. If you can't see it, you can't tax it. Corporate regulators, too, could insist on general-purpose accounting, thereby closing down secrecy loopholes.

Arguably, this is already the standard but the big four audit firms favour cosy client engagement over upholding their industry standards.

Besides an array of irregularities in the Chevron accounts, which all conspire for a complete failure in disclosure, and besides the almost $1 billion in interest charges, there are the usual related-party sales. In 2012, those were $1.1 billion, or 38 per cent of all sales.

In the previous year it was 36 per cent. It would be a fair bet that a lot of this was run through the tax haven of Singapore.

There was no detail given on which entities benefit from this, or from which project the income derived.

Then there were the "recharges" in the order of $144 million, service fees perhaps, charged to Australia instead of deducted from dividend income to head office.

The debt push-down is the big one though. Chevron's operation here is toting more debt than Chevron's entire consolidated operations in the US.

Chevron: A hornswoggler of the highest order