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 arrangement. 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 Organisation for Economic Cooperation and Development (OECD), which helps coordinate international taxation rule-making, to find ways to rein in corporate tax avoidance. The organisation 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 DC-based not-for-profit organisation that has lobbied for stricter international action against corporate tax avoidance. “The victims are the countries and their budgets and their people.”