TAXATION OF UK PETROLEUM

Taxation of UK petroleum

Taxation of UK petroleum

Introduction

The UK has a relatively low-tax, low-allowance system of taxation. The socalled main (that is, top) tax rate on corporate profits had been 30% since April 1999, then fell to 28% on April 1st 2008, except for UK oil extraction/exploration profits, where the rate remains 30%. UK tax-resident companies are taxed at the following rates, depending on their total taxable profits: for total profits up to £300,000, 21% (19% for oil); for total profits of £300,000.1.5m, 21.28% (19-30% for oil); and for total profits exceeding £1.5m, 28% (30% for oil). These thresholds are reduced pro rata if the UK company has associated companies. Similar rates apply to UK permanent establishments of non-UK-resident companies. (Brown, Yucel , 2000, 23-29)

North Sea Oil is in principle subject to corporation tax on its worldwide profits with credit given for most overseas taxes. However, as from July 1st 2009 a new exemption for dividends has been introduced, subject to certain conditions. Profits include chargeable gains. A non-UK-North Sea Oil is subject to corporation tax only on profits of its UK permanent establishments and chargeable gains on assets used or held for the purpose of the trade of the permanent establishment. If a non-North Sea Oil carries out North Sea Oil activities involving UK sources of income, it will be subject to UK income tax. The rate of income tax on rents from holding real property in the UK as an North Sea Oil(Brown, Yucel , 2000, 23-29)

was reduced to 20% (from 22%) as from April 1st 2008. A company will be UK tax resident if it is incorporated in the UK or, if not incorporated in the UK, its place of central management and control is in the UK. In practice this requirement often means determining whether the directors exercise central management and control and, if they do, where they exercise that control. In the view of the government, it is important to maintain a competitive tax system. (Brown, Yucel , 2000, 23-29) Measures, including the new interest cap from January 1st 2010 have been criticised as harming the competitiveness of the British tax system.

Previous measures cited by the government in support of its aim include the following: a new regime for taxing intellectual property, goodwill and other intangibles; an exemption for the capital gains and losses on the sale of a substantial shareholding; a volume-based enhanced tax deduction (175%) for small and medium-sized enterprises (SMEs) for certain revenue expenditre on research and development that, for loss-making SMEs, can also be surrendered for cash; a volume-based enhanced tax deduction (130%) for non-SMEs for certain revenue expenditure on R&D; and a comprehensive system for taxing loan relationships, derivative contracts and foreign-exchange gains and losses. (Brown, Yucel , 2000, 23-29)

The first of three corporate-tax-reform bills forming part of the Tax Law Rewrite project, which aims to make direct tax legislation clearer and easier to use, became law with effect from April 1st ...