A tax loophole that allowed North Sea drillers to pay almost no corporation tax for two decades looks set to be closed.
The change caps the amount a UK company can deduct from profit for leasing drilling rigs from an overseas unit in the same group, typically based in countries where their income is taxed lightly or not at all.
A review of company accounts, shipping registers and other company statements, by Reuters 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 per cent of the UK market in 2012, though there is no suggestion of wrongdoing by any of these companies, all of whom 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 £7bn, but their combined tax charge was only about $42m.
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.
The changes were first announced by Finance Minister George Osborne in March and 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.
The amount companies can deduct from profit for such lease payments will be limited to 7.5 per cent of the historical cost of the rig, replacing generous deductions calculated on the market value of rigs, which have 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 per cent of the market value of a rig each year.
"Currently, some companies making significant operating profits in the UK are able to move up to 90 per cent of these profits overseas and out of the UK tax net," a spokeswoman 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.
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 taxpayer confidentiality.
A spokesman said they ensured all businesses paid the tax they should, but 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".
The amount of money the government expects the tax change to raise is equivalent to around 5 per cent of total rig market revenues, which would have raised an additional around £360m from Transocean, Ensco and Rowan alone over the last 10 years.