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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.
Approach
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, Rowan Companies and Transocean, which collectively accounted for over 60% 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."
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.
Deductions
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% of these profits overseas and out of the UK tax net," a spokesperson for the UK Treasury said.
"In 2012, more than £1.75bn 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.
Andrew Cox, Tax partner at Deloitte, said HMRC had most recently agreed in 2008 that drillers could take tax deductions of up to 20% of the market value of a rig each year.
