A new Skatteforsk working paper, The Global Allocation of Extractive Windfalls by Alice Chiocchetti and Ninon Moreau-Kastler, asks a simple but important question: when prices for oil, gas and minerals rise and multinational companies make large windfall profits, where do those extra profits actually end up? Are they reported in the countries where the resources are extracted, or do some of the gains find their way to tax havens?
Find the full working paper here.
The question matters because natural resources are an important source of government revenue in many countries. At the same time, much of the world's extraction is carried out by multinational enterprises with operations spread across many jurisdictions. This means that where a company extracts a resource and where it reports the resulting profits do not necessarily have to be the same place.
"When commodity prices spike, large windfall gains arise in the short run, because volume supplied and extraction costs stay relatively stable. Our paper show that the international footprint of extractive multinationals is an important determinant of the distribution of these windfalls across countries.", says Ninon Moreau-Kastler.
To follow the money, the researchers combine detailed Country-by-Country Reports on multinational companies' profits, revenues, taxes, employees and assets with data showing where those companies actually extract oil, gas and minerals.
The resulting dataset covers 77 multinational enterprises operating across 206 countries between 2016 and 2023. Together, the companies account for around 31% of global mining production, 37% of multinational oil and gas production and 35% of the profits of listed extractive companies worldwide.
By comparing companies that specialize in different commodities with changes in global commodity prices, the researchers can trace what happens inside multinational groups when a price increase suddenly makes extraction much more profitable.
Three findings stand out
- 1. Around 20 cents of every additional windfall dollar goes to tax havens
When commodity prices increase and generate additional profits, most of the windfall still goes to affiliates in the countries where extraction takes place. But a substantial share does not.
The researchers estimate that for every additional dollar of windfall profit, around 80 cents accrue to extractive affiliates, and 20 cents are booked in tax havens. They find no significant increase in profits in the rest of the multinational group, including affiliates in countries where commodities are processed or consumed.
That is particularly striking because tax havens account for a smaller share of profits under normal conditions. On average, around 12% of positive profits are booked in tax havens. During a windfall, their share of the additional profits is considerably larger.
- 2. Profit shifting becomes more pronounced when the windfall gets bigger
The amount going to tax havens is not simply a fixed share of profits. The researchers find that multinational companies allocate a larger proportion of their profits to tax havens when profitability rises.
A 10% increase in a multinational group's profits is associated with a one percentage point increase in the share of its global profits booked in tax havens. In other words, the incentive or ability to move profits to low-tax jurisdictions appears to become stronger precisely when commodity booms create unusually large rents.
This challenges the idea that profit shifting remains roughly proportional as companies become more profitable. In the extractive sector, a sharp rise in commodity prices can dramatically increase profits without requiring a similar increase in production, employees or other real economic activity.
- 3. Tax havens capture the upside, but not the downside
There is another striking asymmetry. Tax haven affiliates benefit when commodity prices rise, but they do not appear to absorb the corresponding losses when prices fall.
During downturns, neither the probability of reporting a loss nor the size of losses in tax havens responds significantly to negative commodity price shocks. Extractive affiliates, by contrast, are much more exposed to the downside.
The researchers also find that the response to commodity price changes is particularly pronounced among affiliates specialising in intra-group finance, which are disproportionately located in tax havens.
Why it matters
The findings have important implications for countries trying to tax natural-resource windfalls.
Governments often turn to corporate income taxes and special windfall profit taxes when soaring commodity prices generate exceptionally high profits. But the study suggests that these taxes may be particularly vulnerable to profit shifting at exactly the moment when the potential tax base is largest. Without effective safeguards, part of the windfall governments are trying to tax can instead be booked in low-tax jurisdictions.
“When prices rise sharply, profit shifting intensifies. This is why enforcement effort and global cooperation should intensify as well in times of high prices”, says Moreau-Kastler.
The authors point to two possible responses. Tax authorities could increase scrutiny and enforcement during commodity booms, when the incentive to shift profits appears to be strongest. They also suggest that price-contingent royalties, which automatically rise when commodity prices are high, could make resource taxation less vulnerable to the movement of reported profits while avoiding the disadvantages of high flat production taxes when prices are low.
The broader message is that a commodity boom does not automatically translate into an equally large windfall for the countries where natural resources are located. Who ultimately benefits depend not only on what is extracted and at what price, but also on where multinational companies report the resulting profits.