The Shell Files

For decades, governments and corporate interest groups have pointed to transfer pricing rules as the international standard that prevents multinational corporations from shifting profits to tax havens. Yet the Shell Files—a cache of confidential transfer pricing documents that emerged after a 2020 cyberattack—paint a different picture.

Rather than demonstrating a system that prevents profit shifting, the documents illustrate how the OECD’s own rules can be used to facilitate it and, as a consequence, enable aggressive tax avoidance.

Although this report focuses on Shell’s practices, its conclusions extend well beyond a single company. The Shell Files offer a rare glimpse into a system that governs virtually every multinational corporation, which includes transfer pricing reports that are not usually made public. They reveal structural weaknesses in the OECD’s approach that apply across the global corporate tax system.

The fiction at the heart of transfer pricing

Transfer pricing refers to how companies within a multinational corporate group price transactions between themselves, such as when one company sells goods or services to another. These corporate groups often consist of hundreds, sometimes thousands, of separate subsidiary companies registered in different countries.

These internal prices matter because they determine where profits are recorded. Since corporate tax rates differ dramatically across countries, allocating more profit to subsidiaries in low-tax jurisdictions reduces the multinational’s overall tax bill.

To prevent abuse, the OECD requires related companies to behave as if they were independent businesses pursuing their own commercial interests. This is known as the arm’s length principle.

The report argues that this principle rests on an unrealistic assumption. Multinational corporations exist precisely because they operate as integrated businesses under common control, not as independent firms negotiating against one another. Asking them to price transactions between subsidiaries as though they were unrelated parties requires them to forego their financial interests.

The Shell Files show how transfer pricing rules facilitate a ‘pick-and-mix’ approach by corporations. What this leads to is a system that does little more than provide a veneer of legitimacy for multinational corporations’ tax avoidance practices.

Subjective rules, predictable outcomes

The OECD provides extensive technical guidance for applying the arm’s length principle, including analyses of functions, assets, and risks, as well as benchmarking exercises comparing transactions with supposedly similar market examples.

These methods appear objective. In practice, however, they depend heavily on judgment.

Companies decide which subsidiary is considered to perform the most valuable functions, own the most valuable assets, or bear the most risk. The Shell Files illustrate how these technical exercises can support profit allocations that place substantial profits in low-tax jurisdictions while remaining consistent with OECD guidelines.

These issues are not unique to Shell. Rather, the OECD framework itself provides multinational corporations with considerable flexibility in determining where profits are recognised.

Three case studies, one underlying problem

The report outlines three case studies covering oil trading, intellectual property and intra-group services. Although they involve different parts of Shell’s business, they illustrate the same structural weakness in the OECD’s transfer pricing guidelines.

1. Oil trading in The Bahamas. When it comes to buying and selling oil, Shell’s transfer pricing documentation allocates the vast majority of risks and most essential functions to its Bahamian oil trading subsidiary, rather than its oil producing and refining ones. This allowed a large share of trading profits to be recognised in a jurisdiction that, during the period examined, had a 0 per cent corporate income tax rate. Between 2018 and 2023, the Bahamian subsidiary had 37 employees and generated $6.2 billion in profit. Using the ‘profit-per-employee’ metric, SOMO’s research shows that Shell’s trading arm in The Bahamas was 104 times more profitable than the average Shell entity. The way in which Shell applied the OECD tools, combined with the dramatically greater than average profit-per-employee, provides a clear indication of profit shifting to a zero-tax country. Shell denies that it engaged in profit shifting but was unable, or unwilling, to explain the profit levels or why it has a trading company in The Bahamas.
   
   To assess the potential scale of profit shifting, SOMO compared Shell’s Bahamian trading office to those it operates in the Netherlands and the UK, which recorded much lower levels of profit-per-employee. If Shell’s operations in The Bahamas were profitable at a level similar to its European trading operations, then between 2018 and 2023, SOMO estimates that up to $ 5.6 billion of Shell’s Bahamian profits could potentially have been taxed elsewhere. Based on trade data, the primary affected jurisdictions would be Brazil, Nigeria and the UK.
2. Intellectual property in Switzerland. The report examines how royalties for the use of Shell’s trademarks have been justified using different OECD-approved approaches over time. Until 2017, Shell’s method for determining royalties was based on its own preference and a controversial rule of thumb called the 25 per cent rule. After 2017, it came to rely on benchmarking against third-party licensing agreements. The case highlights that benchmarking is not an objective exercise: companies have considerable discretion in selecting comparables and in choosing their arm’s length price from within wide benchmark price ranges.
3. Services in the UK and the Netherlands. Shell has large service operations which employ thousands of people in its two countries of origin. And yet, for many years, neither of these operations recorded any profit, despite OECD guidelines stating that intra-group service provision generally needs to be profitable, just as commercial service providers aim to be. To illustrate the scale of the profits involved, SOMO simulated how much profit Shell’s UK and Dutch service companies would have earned had they applied profit margins of 5–10%, rather than operating at cost. Between 2002 and 2016/17, this would have resulted in an additional €5.2 billion in profits in the Netherlands and £1.6 billion in the UK, corresponding to an estimated €1.1 billion and £343 million in additional corporate income tax, respectively.
   
   Following interventions by tax authorities in the UK and the Netherlands in 2016 and 2017, respectively, Shell adopted benchmarking to determine profit margins instead of at-cost service provision. This requires companies to compare their pricing to transactions between independent parties not belonging to the same corporate group. While companies cannot compare oil trading with selling oranges, they still have choices as to which transactions they choose as comparables (and perhaps more importantly, which they do not choose).
   
   Empirical studies simulating benchmarking show that the lowest and highest values in benchmarking samples are often 200 per cent apart, making them very unreliable. The Shell Files contain one benchmarking study done for one of Shell’s Dutch upstream service operations. The range of acceptable profit margins specified by that benchmarking study was 2.2 to 21.2 per cent – a difference of about 860 per cent – for Shell to freely choose a profit margin from.

Taken together, the case studies do not point to isolated weaknesses in particular transactions but to the same underlying issue. Different OECD methodologies can often be used to justify different outcomes. Companies may change methods over time, combine multiple approaches, or rely on complex benchmarking exercises that leave substantial room for interpretation. As long as the required documentation is produced, significant profit shifting can remain compatible and in compliance with the OECD guidelines.

Our diagnosis shows that these shortcomings are not accidental and points to a structural problem. The OECD’s transfer pricing framework relies heavily on documentation produced by the companies themselves, subjective judgments about functions, assets and risks, and benchmarking exercises. This limits the ability of tax authorities to challenge aggressive profit shifting. Compliance with the rules, therefore, becomes compatible with large-scale tax avoidance.

Time for an alternative, fairer system

Addressing corporate tax avoidance will require moving beyond transfer pricing altogether. The leading alternative is unitary taxation with formulary apportionment. Instead of treating subsidiaries as separate businesses, this approach recognises multinational corporations as single (unitary) enterprises. This approach takes total global profits and then allocates them between countries based on measurable economic factors such as employment, sales and tangible assets.

Because profits would follow real economic activity rather than internal pricing decisions, opportunities for profit shifting would be substantially reduced.

The Shell Files suggest that the problem is not just how multinational corporations use the OECD’s rules, but the rules themselves. The process for a United Nations Tax Convention, started in 2024, provides a unique opportunity to achieve a shift away from the OECD’s transfer pricing to unitary taxation.

SOMO communicated with Shell several times during its analysis of The Shell Files. The company maintains that it adheres to the OECD’s transfer pricing guidelines and denies that it engaged in profit shifting.