By OGJ editors
HOUSTON, Apr. 6 -- The 2004 UK budget approved Mar. 17 contains scant incentives for oil and gas companies operating on the UK Continental Shelf, said analyst Ernst & Young LLP, an opinion shared by a number of analysts.
Removal Jan. 1 of the petroleum revenue tax (PRT) on new shipments of oil and gas through pipelines and platform infrastructure built before 1993 (OGJ Online, May 5, 2003) is a positive change, the analyst said, but there is a debate on the appropriate level of cost disallowance, which will impact the measure's effectiveness. It "has limited application and will have no real impact on activity in the sector," Ernst & Young added.
Another budget measure is the exploration expenditure supplement (EES) to provide tax relief for companies not yet having enough tax liability to enable them to use the 100% capital allowances for exploration and appraisal expenditures under the research and development code. For these companies, the EES will provide a 6%/year uplift in the value of unused capital allowances due to qualifying E&A expenditures carried forward annually to 6 years.
The budget also initiated moves against thin capitalization and transfer pricing on Apr. 1. These are changes to PRT legislation that are designed to counter perceived tax avoidance. These measures will impact large (having more than 250 employees) UK groups, partnerships, and joint ventures, which no longer will be able to make transactions to subsidiaries or partners at a loss in order to obtain a tax advantage. They now will be required to substitute an "arm's length" price to all companies.
Companies sought to defer the date of introduction in order to allow them more time to comply with the new rule. "It's disappointing that the new [rule] for UK transactions has been introduced so quickly before enterprise has had time to prepare," said Ernst & Young partner Sara Pickering.
The new budget also introduces disclosure requirements relating to certain tax schemes and arrangements. While these requirements will apply to anyone who promotes tax schemes as defined by UK's Inland Revenue, they also will require companies who implement such schemes to disclose them and, more importantly, companies are also required to disclose all in-house schemes they devise.
Although Ernst & Young said they yet had no details of the provisions, "it may be that the Inland Revenue have in mind rules similar to the US tax shelter regulations, which place a heavy compliance burden on large companies to review all their transactions in light of the regulations to ensure that they make appropriate disclosures."
