(Reuters) – Bermuda and the Bahamas aren’t exactly big players in the oil-and-gas world. They don’t produce any of the fuels at all. Yet the islands are deep wells of profit for European oil giant Royal Dutch Shell Plc.

In 2018 and 2019, Shell earned more than $2.7 billion – about 7% of its total income in those years – tax-free by reporting profits in companies located in Bermuda and the Bahamas that employed just 39 people and generated the bulk of their revenue from other Shell entities, company filings show.

If the oil-and-gas major had booked the profits through its headquarters in the Netherlands, it could have faced a tax bill of about $700 million based on the Dutch corporate tax rate of 25%. The bill would have been much steeper if the income were reported in oil-producing countries – some of which levy rates exceeding 80%.

Shell and other oil majors are avoiding hundreds of millions of dollars in taxes in countries where they drill by shifting profits to thinly staffed insurance and finance affiliates based in tax havens, according to a Reuters review of corporate filings and rating agency reports. Shell, BP Plc, Chevron and Total use subsidiaries in the Bahamas, Switzerland, Bermuda, the UK Channel Islands and Ireland to provide their global operations with banking, insurance and oil-trading services, the documents show. These subsidiaries, in turn, book profits that go lightly taxed or entirely tax-free.

Such arrangements are not illegal. But they highlight the ability of international oil corporations to game global tax systems and avoid handing over revenue to nations where they conduct their core business, according to academics who study corporate taxation.

The profits generated by those offshore units are enormous, despite their tiny operations. BP’s so-called captive insurer – meaning it serves only other BP entities – had $6.5 billion in cash on hand at the end of 2018 after years of robust annual profits, according to insurance rating agency AM Best Co. The insurer, Jupiter Insurance Ltd, has accounted for as much as 14% of BP’s global annual profits in recent years, according to AM Best figures and BP’s financial statements. Jupiter has six directors but no employees; BP outsources insurance administration to a brokerage located in Guernsey, a tax haven in the UK Channel Islands.

Located about 75 miles south of the British coastline, Guernsey is not part of the UK but is a British crown dependency and sets its own tax rates. It charges no tax on corporate profits derived from revenues generated outside the island.

BP spokesman David Nicholas said Jupiter “is a UK tax resident and therefore is subject to UK tax.”

But BP’s insurer paid no UK taxes at all in 2019, according to the oil company’s 2019 Tax Report, which was released Wednesday, the same day this story was published. BP offset Jupiter’s taxable income with losses from other UK-based affiliates, which the BP report called a typical arrangment. BP said it released the tax report – for the first time – out of a desire to be more transparent about taxation.

The report said the company does not “engage in artificial tax arrangements.”

The big oil firms’ captive insurers are far more profitable than a typical insurance company. That’s because the amount they pay in claims accounts for a far lower proportion of the money collected in premiums – all from other affiliates of the oil giants – than is the case at other insurers, Industry data shows. That means the captive insurance units absorb part of the revenue made by the oil majors’ subsidiaries elsewhere – often in high-tax countries where they extract oil and gas – and shift it to operations located in low-tax or no-tax jurisdictions.

The oil companies have also transferred capital to tax havens to establish banking units that lend money to sister companies. Shell established an oil trader in the Bahamas that generates revenue primarily by buying and selling oil among other Shell affiliates.

The companies named in this story all said they followed tax rules of the nations where they do business. Their subsidiaries in tax havens, the companies said, were located there for commercial or operational reasons rather than to avoid taxation.

Shell denied that its arrangements constituted tax avoidance and said the location of its subsidiaries were driven by business rather than tax reasons.

Profit-shifting among affiliated companies has long been a concern among the Group of 20 nations, which have asked the Organization for Economic Cooperation and Development (OECD), which helps coordinate international taxation rule-making, to find ways to rein in corporate tax avoidance. The organization in February issued new guidance on the treatment of intra-group financial transactions, advising nations to limit deductions on such payments.

Critics of corporate tax planning say oil firms’ profit-shifting undermines their claims to responsible corporate governance and exacerbates the deep budgetary problems that many oil-producing countries face amid the coronavirus pandemic and a related drop in oil prices.

“These companies are deliberately exploiting gaps in tax law and weak enforcement, and they are doing so in order to make enormous profits,” said Raymond Baker, president of Global Financial Integrity, a Washington D.C.-based not-for-profit organization that has lobbied for stricter international action against corporate tax avoidance. “The victims are the countries and their budgets and their people.”

Nations such as Angola, Brazil and Trinidad, who rely heavily on oil tax revenues, have had to moderate spending and increase borrowing to respond to the health crisis.

Nigeria is another country that relies heavily on oil tax revenues. Waziri Adio – executive secretary of the Nigeria Extractive Industries Transparency Initiative, which advocates for stronger governance of oil revenues – said the practices of oil companies may be legal but aren’t fair.

“This is something that robs Nigeria of legitimate revenues and will affect the ability of the government to deliver badly needed services to its citizens,” Adio said.

The governments of Nigeria, Angola, Brazil and Trinidad did not respond to requests for comment.

Tax advisors said companies owe it to their shareholders to pay the lowest-possible tax bill.

“Tax planning is a legitimate part of business,” said Bryan Kelly, a partner with law firm Withers in Los Angeles. “The board of directors has a fiduciary duty to maximize profits.”

‘THE NUMBERS DON’T MAKE SENSE’

Shell booked $1.3 billion in 2018 and 2019 profits through Bermuda-based banking and insurance subsidiaries that together employed three people, according to the company’s ‘Tax Contribution Reports’ published in November this year and December 2019 which detail tax payments.

The tiny firms provide insurance and loans to Shell oil-producing facilities worldwide, although Shell said in its most recent tax report, published last month, that it ceased the intra-group lending from Bermuda in 2020 for reasons the company did not disclose. In 2018, the companies derived 96% of their revenues from other Shell companies.

The operations appear to exist primarily for tax purposes, said Richard Murphy, professor of political economy at City University of London. The high profitability of the Bermudan units – along with their heavy reliance on revenue from affiliates – suggests that they are designed to shift profits to low tax jurisdictions, he said.

“The numbers don’t make sense. If Shell is so good at making money in insurance and lending, why doesn’t it sell its services to outside companies and make even more money?” Murphy said.

Shell denied that its Bermuda operations are designed for tax avoidance. “Where Shell entities operate in low-tax jurisdictions, they are there for commercial and substantive reasons,” the company said in a statement.

Over $1.8 billion of Shell’s 2018 and 2019 tax-haven profits were booked by Shell Western Supply and Trading Ltd, a Bahamas-based oil trading operation employing 36 people, Shell said in its tax reports. The company buys oil from Shell fields and other producers in West Africa, Brazil and Guyana and sells two-thirds of the crude to other Shell affiliates.

The in-house oil trader outperforms other big oil merchants. Its annual profits were almost equal to the total $992 million that was earned through the end of September 2019 by independent oil trader Trafigura Group PTE Ltd – which employed 5,106 staff that year, Trafigura’s financial statements show. Shell Western enjoyed a profit margin of 4.1% across 2018 and 2019, according to its tax report. That’s more than four times the level independent oil traders typically report, according to financial statements of the three of the biggest industry players – The Vitol Group, Trafigura and Mercuria Energy Trading BV.

Margaret Cooper, a researcher at Henley Business School near London who studies multinational firms’ tax planning strategies, said that in-house oil trader’s location, its relative high profits and its dependence on trading with affiliated firms suggests that its dealings are designed to avoid taxes.

“I can’t think of any other reason than tax reasons why the company is located where it is,” Cooper said.

Shell declined to comment on whether Shell Western pays any taxes or to answer questions about whether its oil-trading operation is designed for tax avoidance. The company said in a statement that Shell Western’s profits are commensurate with its commercial activities.

BIG INSURANCE PROFITS, LOW TAXES FOR BP

BP’s unusually profitable insurer is housed in the picturesque St Peters Port, the largest town on the island of Guernsey in the English Channel.

A 2019 report from insurance rating agency AM Best noted strong underwriting profits and operating results over the past five years, resulting in a “very strong” balance sheet, with $6.5 billion in cash at the end of 2018.

AM Best reports from previous years include more details on the operation – including immense profits that would be the envy of any insurer.

In 2014, Jupiter had an operating ratio – which includes pay-outs and other costs as a share of premiums – of just 1.3%. That compares to more than 90% for most U.S. insurers, according to data from the Insurance Information Institute, an industry trade group. Jupiter booked profits totaling $5.8 billion from 2010 to 2013, the last year for which AM Best published profit figures. In 2013, Jupiter’s earnings amounted to 14% of the operating profit reported by BP in financial disclosures.

Jupiter’s profit margins remained exceptional through those years despite the explosion of BP’s Deepwater Horizon rig and subsequent oil spill in the Gulf of Mexico in 2010, one of the worst industrial accidents in history. The incident caused $70 billion in damages, but Jupiter’s payouts to affiliated companies were capped at $1.5 billion for any one event. So, the insurer kept a loss ratio under 15% of premium income for the years 2009 to 2013, according to a 2014 AM Best report.

BP group retained access to Jupiter’s hefty cash pile because the captive insurer lends 98% of its reserves back to Jupiter’s parent, London-based BP International Ltd, for terms of a year or less, according to AM Best. BP pays interest on the money back to Jupiter, adding to the insurer’s low-tax or no-tax profits.

Murphy, the University of London professor, estimates Jupiter could save BP hundreds of millions of dollars annually given its high profitability and the high tax rates that many countries place on oil production.

Jupiter’s registered office is on the first floor of Albert House on the Esplanade, overlooking the harbor in St Peter Port. The offices are not BP’s but belong to a multinational insurance brokerage and advisory company, Willis Towers.

Richard Parris Smith, head of office at Willis Towers Management Guernsey, said his firm manages Jupiter on behalf of BP and has 30 employees that serve all of its clients. Willis Towers lists 35 other captive insurers as clients on a sign outside its office door.

CHEVRON’S BERMUDA INSURER

California-based Chevron Corp operates a captive insurer in Bermuda. Until 2015, AM Best issued reports on Heddington Insurance Ltd and rated it highly due to its “good loss history” and “very strong investment income” made through high-interest loans to other Chevron companies. The rating agency did not report specific profit figures or operating ratios for Chevron’s insurer.

Chevron said it formed Heddington to reduce insurance costs and provide broader coverage than what is available in the commercial insurance market. The company said the insurer paid U.S. taxes but declined to detail how much or the effective rate.

Other oil firms have tax-haven subsidiaries through which they self-insure their facilities. France’s Total SA operates Swiss-based Omnium Reinsurance Company S.A., its financial filings show. Total did not respond to requests for comment about Omnium. Switzerland offers captive insurers special tax treatment and rates of less than 10%.

Italy’s Eni SpA operates an Irish-based insurer which covers the company’s facilities in places including Algeria and Nigeria. Like Shell and BP’s insurers, Dublin-based Eni Insurance DAC enjoys lower pay-out costs as a percentage of revenue than insurance industry averages. It reported a profit of 56 million euros in 2018, on which it paid tax at a rate of just 12.5% – half the Italian rate, and a fraction of the amount it would face in oil producing countries.

Eni Insurance DAC says in its financial statements that it aims to reduce insurance costs for the Eni group. Eni said its insurer generates strong profits because it does not have marketing costs to recruit clients like most insurers. The company said in a statement that the insurer’s premiums are in line with market rates and denied the business is designed for tax avoidance.

“The decision to establish the Eni Captive headquarters in Ireland was solely driven by business reasons,” the company said.