(Corrects paragraph 15 to up to 15 percent, not up to 20 pct)
* Industry pays little or no tax on 2 bln stg annual
* Tax change to cap intra-group deductions for rig leasing
* MPs criticise tax authority for leniency to business
* Tax authority accepts transfer pricing outcomes not always
By Tom Bergin
LONDON, May 13 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 2
billion pounds 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 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, 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 $11.8 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
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.
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.
Andrew Cox, Tax partner at Deloitte, said HMRC had most
recently agreed in 2008 that drillers could take tax deductions
of up to 15 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
"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
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
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 criticised 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
($1 = 0.5938 British Pounds)
(Editing by Will Waterman and Philippa Fletcher)