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 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 Reuters 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 <ESV.N>, Rowan Companies Plc <RDC.N> and Transocean Ltd <RIG.N>,
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 $11.8 billion. Their combined
tax charge was just $70 million.
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.
The Treasury said the strong profitability of the sector was part of
the reason for acting now, though a broader government drive to
tackle tax avoidance was also a factor.
"Currently, some companies making significant operating profits in
the UK are able to move up to 90 percent of these profits overseas
and out of the UK tax net," a spokeswoman for the UK Treasury said.
"In 2012, more than 1.75 billion pounds ($2.95 billion) was paid by
oil and gas operators in the UK to contractors who lease drilling
rigs and accommodation vessels. Almost no corporation tax was
received on this," the finance ministry added.
GENEROUS DEDUCTIONS
Osborne's change, which will limit the amount companies can deduct
from profit for such lease payments to 7.5 percent of the historical
cost of the rig, will replace generous deductions calculated on the
market value of rigs, which has been soaring.
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Andrew Cox, Tax partner at Deloitte, said HMRC had most recently
agreed in 2008 that drillers could take tax deductions of up to 20
percent of the market value of a rig each year.
Michael Meacher, MP with the opposition Labour party, which governed
from 1997 until 2010, said HMRC's failure to tackle drillers'
profit-shifting earlier raised questions about its overall
effectiveness.
"How much money are we losing elsewhere? I suspect that this is
quite widespread. What we really need is an investigation by the
National Audit Office to see how far this lax attitude to taxing
companies applies across other sectors," he said, adding HMRC should
receive more resources to crack down on profit shifting.
HMRC declined to comment on how it went about taxing the drilling
companies over the past 20 years, noting that the small number of
participants in the sector meant any comments it made could identify
individual companies and thus breach rules on taxpayer
confidentiality.
However, a spokesman said HMRC ensured all businesses paid the tax
they should.
HMRC acknowledged that the changes were partly in "recognition ...
that transfer pricing and other international rules do not always
provide a fair or consistent outcome".
A number of inquiries held by the parliamentary Public Accounts
Committee in recent years have criticized HMRC for not being
aggressive enough with big businesses.
The amount of money the government expects the tax change to raise
is equivalent to around 5 percent of total rig market revenues,
which would have raised an additional around $600 million from
Transocean, Ensco and Rowan alone over the last 10 years.
($1 = 0.5938 British Pounds)
(Editing by Will Waterman and Philippa Fletcher)
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