Economic Report 2001 Index

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Appendix I Fiscal Regime All company profits in the UK are subject to Corporation Tax (CT) and this applies in slightly modified form to the oil and gas exploration and production industry. The main feature is that UK oil and gas extractive profits are ring-fenced, so that losses from other activities cannot be offset against other oil and gas profits. The industry is also subject to indirect taxes such as VAT (onshore) and various other taxes, which apply to all businesses such as Air Passenger Duty, Insurance Premium Tax etc. In addition to normal taxation, the industry is uniquely subject to two imposts. These are Royalty and Petroleum Revenue Tax (PRT). Figure 34 illustrates how the marginal rate of Government take on oil and gas fields is built up.   Figure 34: Government Take from Fields Ranges from 30% to Nearly 70%   Royalty: 12.5% on production from fields which received development consent on or before 31st March 1982. The costs of conveying and treating the product are deductible, but Royalty is not fully profit based. Petroleum Revenue Tax: 50% of profits from fields which received development consent before 16th March 1993. Each field is taxed separately, so that losses incurred in one field cannot be offset against profits of another. Capital and operating costs are deductible. Most capital incurred before Payback (see below) also qualifies for an additional deduction of 35% (Uplift) in lieu of interest costs which are not deductible. Payback is the period in which total cumulative income exceeds total cumulative expenditure. Two reliefs, Uplift and Safeguard, are linked to the Payback period. Safeguard is the mechanism that limits PRT, during each six-month chargeable period, to 80% of the excess of profits over 15% of cumulative capital qualifying for Uplift. This mechanism applies during the period from start of production to Payback plus half as long again. The first 250,000 tonnes per 6-month period up to a cumulative total of 5 million tonnes, produced from a field, which received development consent before 31st March 1982 is tax free (Oil Allowance). For southern fields, the amounts are 125,000 and 2.5 million tonnes and for all other taxable fields, 500,000 and 10 million tonnes respectively. Tariff and Disposal receipts are also subject to PRT, after deduction of a Tariff Receipts Allowance if the user field is also subject to PRT. Gas sold under a contract made before 30 June 1975 is exempt from PRT. Corporation Tax: 30% of total taxable income of the corporation. Operating, exploration and appraisal costs are all effectively tax deductible as incurred. Most other costs can be written off on a 25% reducing balance basis. Interaction: Royalty is deductible in calculating PRT. Royalty and PRT are deductible in calculating CT. Taxation on Mature Fields Mature oil and gas fields are subject to two additional taxes which can put new investments in older fields at a disadvantage compared with competing new field investments. Firstly, the aggregate marginal rate of tax, taking into account Royalty, Petroleum Revenue Tax and Corporation Tax, is nearly 70% which is high by international standards. Secondly, drilling costs are not deductible for Royalty. This penalises the additional drilling activity that is essential to maximising recovery. In a few recent cases the Government has granted Royalty remission, a discretionary arrangement available since the 1975 Petroleum and Submarine Pipelines Act, and this has enabled projects that were previously deemed uneconomic to progress to commercial development. Mature fields can be disadvantaged by this high burden of taxation and incremental projects can be discouraged. This could have the effect of reducing the life expectancy of the fields, which can cause premature cessation of production and early decommissioning. Once such fields are closed down, the possibility of producing small satellite reservoirs may disappear forever. In addition, the infrastructure is no longer available for transportation of hydrocarbons from other areas. Competition among owners of pipelines and other infrastructure should be open and equal in order to encourage the most efficient use of capital invested. Owners of infrastructure, which is linked to mature fields for tax purposes, pay much higher taxes on tariff income than would owners of newer infrastructure.