The Turnbull government has acknowledged for the first time that Australia is failing to secure a fair share of revenue from oil and gas companies, with Treasurer Scott Morrison calling a review into the tax scheme governing offshore projects.
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In a stunning admission more than 12 months after Fairfax Media revealed concerns that the petroleum resource rent tax was being gamed by the biggest fossil fuel multinationals, Mr Morrison conceded on Wednesday: "We think it is a problem."
Former Treasury official Mike Callaghan will lead what Mr Morrison called a "comprehensive and holistic review" into why PRRT collections are a paltry $800 million a year, down half since 2013, and why revenue for the oil excise has halved over the same period.
This week's Auditor-General report into one offshore project in the $200 billion industry, the North West Shelf, found a $5 billion bonanza in tax deductions taken by the companies behind the project, including Woodside, Chevron, BP, Shell and BHP Billiton, which have reduced their royalty bills.
Fairfax Media has revealed concerns around the wider industry which has built up a $187 billion mountain of tax credits that will insulate the largest projects like Chevron's Gorgon venture from paying any PRRT, perhaps for decades.
Mr Morrison did not quantify the revenue hole from unpaid PRRT or confirm that it could run into the billions of dollars.
"That assumes that all of the deductions that are made are ineligible. That is an aggressive claim," he said.
In announcing the inquiry, Mr Morrison warned that revenues are set to fall even further.
That's despite Australia being on track to eclipse Qatar as the world's biggest exporter of liquefied natural gas by 2020.
"I anticipate that we will see a further [revenue] deterioration potentially in this area and that is why it is important that we address it," Mr Morrison said.
"We have seen this. We think it is a problem."
The inquiry of Mr Callaghan, a chief of staff to former Liberal treasurer Peter Costello, will report in April to allow Mr Morrison to outline new measures in the May budget.
Mr Morrison acknowledged concern that the PRRT was not operating as it was "originally intended" and said the inquiry would "address the reasons for the rapid decline of Australian PRRT revenues".
"The integrity of Australia's tax base is paramount," he said.
"We will ensure that the PRRT provides an equitable return to the Australian community from the recovery of petroleum resources without discouraging investment in exploration and development that is vital to the industry."
The Australian Petroleum Production and Exploration Association, representing the industry, said the review was timely because it would expose a "dramatic collapse in profits" behind falling tax revenue.
"The continued payment of taxes at a time when the industry is under severe pressure debunks critics' suggestions that the industry is not somehow paying its way," said APPEA chief executive Malcolm Roberts.
"Much of the debate about PRRT has been characterised by grossly misleading information, distortion and a willingness to ignore the facts.
The government's inquiry has put in the shade moves by the Greens and Labor to have Parliament look at the PRRT and royalties system.
Labor wants to include public hearings into the existing corporate tax avoidance inquiry by the Senate's Economic References Committee while the Greens are pushing for a standalone inquiry by the same committee.
Fairfax Media has revealed over recent months that just 5 per cent of 150 oil and gas ventures are paying any PRRT, despite Australia being poised to eclipse Qatar as the world's single biggest exporter of LNG by 2020.
Among the concessions accumulated by the industry since the PRRT's imposition under Labor is a write-off for "frontier exploration" in deep water that allows a company to claim 150 per cent of exploration costs back from the Australian Tax Office.
In 2010, Ken Henry's review of the tax system raised concern about the PRRT's "failure to collect an appropriate and constant share of resource rents from successful projects due to uplift rates that over-compensate successful investors for the deferral of PRRT deductions".
The Tax Justice Network welcomed the inquiry on Wednesday.
"The Government needs to make sure that the Australian community is getting the best return on our non-renewable resources for the benefit of funding our hospitals, care of the elderly and people with disabilities, our schools and our universities," said TJN spokesman Mark Zirnsak.
The International Transport Workers' Federation, which has commissioned analysis of the PRRT, said the mountain of tax credits would swallow any public benefit from $40 billion in LNG exports by 2019.
"That's simply unacceptable and the system needs to change," said ITF President Paddy Crumlin
"ITF research demonstrates, internationally, Australia is a soft target for the oil and gas industry. We welcome the Treasurer's announcement as an important first step and look forward to making a submission to the inquiry."
