International Oil Companies: The Tax Disparity – Part II

photo by Darren Kirby

by Margaret Kearney, Louisa Kellogg, Jacqueline Ho, Katherine Wong

Exxon Mobil Corp. and British Petroleum exhibit extreme differences in the amount of taxes that each corporation pays. In 2011, BP’s tax rate was estimated at around 34 percent, while Exxon Mobil’s tax rate was a record low of 13 percent — less than the rate the average American individual taxpayer pays. Exxon Mobil receives this lowered tax rate due to tax breaks from the U.S. government, such as the domestic manufacturing tax deduction that passed in 2004 and was “designed to keep factories in the United States.”

Admittedly, much of Exxon Mobil’s operations occur domestically. While “BP has a larger percentage of its oil and gas reserve assets in the United States than does Exxon Mobil,” Exxon Mobil operates domestically in the United States. But in this situation (and in the rest of its work), BP operates abroad rather than at home in the U.K. Because domestic oil and gas resources are so readily available, Exxon Mobil has little incentive to invest in renewable energy. Heavy subsidies from the government further increase this effect. In this way, the U.S. government sets the precedent that the country should be worried about the well-being of the corporation, but allows the corporation to work in its unbridled self interest and disregard other considerations that may hold more benefits for the U.S. as a whole.

But BP has not had the ease of domestic oil extraction in the U.K. As the oil industry began to rise, the U.K. did not have resources to mine at home and had to expand internationally from the beginning. It is not a coincidence that British imperialism moved the country’s interests to places like Persia in the early 20th century.

BP’s higher tax rate implies more cooperation with its government — BP is a tax-paying citizen of the U.K. and has thereby bought into the country. As a result, BP has a greater interest in the U.K.’s development.

In addition, though BP has a few minor operations in Scotland and the North Sea, most of its oil resources are currently located outside the U.K., heightening the incentive for BP to invest in renewable energy. Thus, BP is more willing to invest in renewable energy because it confers benefits upon the U.K. that oil extraction can’t and because BP can lower costs by operating domestically.

All in all, differing tax regulations and availability of petroleum resources has led to diverging corporate attitudes: Exxon Mobil follows its corporate self-interest and does not wish to invest in renewable energy, whereas BP is willing to cooperate with the British government and invest in alternative energy due to mutual interest with the British government.

Historical interaction with a home government, domestic regulation, and a fluctuating political environment (which we haven’t discussed at length), similarly contribute to a governmental relationship that encourages interest in renewables from BP and disengagement from Exxon Mobil.

In the next installment of the series, we’ll explore the company culture at both corporations.

This article is the second of three in a series written by a Brown University Undergraduate Group Independent Study Project (GISP). Read the first installment here.

photo of an oil refinery by Darren Kirby (http://bit.ly/RrmJ0v)