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HMRC internal manual

Oil Taxation Manual

HM Revenue & Customs
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Capital gains: unitisations: interpretation of unitisation agreements

Redeterminations also raise the question of whether there is a transfer of rights to oil and interests in the related unit assets, or an adjustment of pre-existing rights, and so on. Again the terms of the Unitisation agreement are crucial to an understanding of the precise position.

In the majority of cases, it has been accepted that the beneficial ownership of the oil and the unit equipment is fixed, albeit not finally quantifiable, at the time of the unitisation agreement. Future redeterminations, whether mandatory or voluntary, therefore refine each party’s share of ownership based on subsequent knowledge emerging as the field is developed. The adjustment payments are therefore a balancing up of monies to reflect interests in assets which were always held.

In following that approach for UK sector fields, LB Oil & Gas seeks to secure tax treatment which is symmetrical and broadly consistent, case by case, between the increasing interest parties (IIPs) and decreasing interest parties (DIPs)

For transmedian fields however symmetry is impossible as the UK participators will all be either IIPs or DIPs so that in UK tax terms there is no neutral balance. There are many complications, affecting CT and PRT, including whether there can be pre-existing rights where, in the relevant treaties, the respective governments reserve their right to ratify any proposed amendment to the tract participation amounts. It is however considered there is normally little difference in the basic character of adjustments under unitisations and redeterminations, in transmedian fields, compared with UK only fields.

This would enable the tax treatment for IIPs to follow the approach taken for UK fields but would not work properly for DIPs. The treatment of such payments for capital gains purposes is likely to depend on their treatment for other CT and PRT purposes.