LONDON: A planned change in the way Britain taxes North Sea drillers exposes the loophole in a system that allowed an industry with annual revenues of £2bn to pay almost no corporation tax for two decades, prompting accusations that the UK tax authority is falling down on the job.
The change, announced by Finance Minister George Osborne in March, caps the amount a UK company can deduct from profit for leasing drilling rigs from an overseas unit in the same group.
The rig-leasing units are typically based in countries where their income is taxed lightly or not at all. A review of company accounts, shipping registers and other company statements, shows that such inter-company transactions — known as transfer pricing — have enabled drilling groups in the North Sea to operate almost tax free for 20 years or more, perfectly legally, and with the agreement of Britain’s tax authority, Her Majesty’s Revenue & Customs (HMRC).
Companies that have benefited from the current rules include Ensco Plc, Rowan Companies Plc and Transocean Ltd, which collectively accounted for over 60 percent of the UK market in 2012.
There is no suggestion of wrongdoing by any of these companies, which declined to comment. “HMRC has always been fully aware that companies use this approach,” said Mike Tholen, Economics Director at North Sea industry body, Oil and Gas UK. “The arrangements were appropriate fiscally for the business these companies have.”
Between 1993 and 2012, the last year for which accounts were available, the main British operating units of Transocean, Ensco and Rowan reported combined UK revenues of $11.8bn. Their combined tax charge was just $70m.
John Sweetman a former tax inspector and now a tax consultant, said it was unusual that an industry could continue for so long with such a light tax burden. “I suspect the industry was a step ahead. These companies were very well advised .. (but) it is a long time. It’s odd,” he said. Reuters