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HMRC internal manual

Oil Taxation Manual

Taxation of Non-Residents under Section 830 ICTA 1988: Double Taxation Agreements - Operations of semi-submersible drilling rigs

Most of the concerns operating semi-submersible drilling rigs in the UK Continental Shelf are either UK resident or “residents of” a country with which the UK has a treaty containing an Offshore Activities Article (see OT41560)

However, from time to time the HMRC may have to determine whether a semi-submersible drilling rig is a permanent establishment (PE) within Article 5 of the relevant Double Taxation Treaty. HMRC considers that in principle a semi-submersible drilling rig may be a permanent establishment and that the issue must be determined by reference to the facts of each particular case and the relevant DTA and OECD Commentary.

The model OECD treaty lists a number of examples at Article 5(2) which can be regarded as PE’s but the only specific reference to oil & gas is at sub-paragraph (f) which lists “any other place of extraction of natural resources”. The Commentary on the Model OECD treaty however stresses that this term does not extend to exploration and consequently we have to rely on the general definition of permanent establishment for semi submersible drilling rigs carrying out this type of activity.

The general definition of a PE is at paragraph 1 of Article 5 which says “the term permanent establishment means a fixed place of business through which the business of an enterprise is wholly or partly carried on”.

It is generally accepted that a semi-submersible drilling rig constitutes a place of business and that the exploration or exploitation activities carried on at the rig are carried on through that place of business. The issue focusses entirely on whether or not the place of business is fixed.

Fixed in this context is explained at paragraph 2 of the Commentary on Article 5(1) in the model treaty - “it must be established at a distinct place with a certain degree of permanence”. Thus there needs to be a physical component (geographical requirement) as well as a temporal one (time requirement) before it can be regarded as fixed.

Paragraph 5 of the Commentary explains the physical part - “there has to be a link between the place of business and a specific geographical point” but goes onto say that equipment constituting the place of business does not have to be actually fixed to the soil.

Paragraph 6 of the Commentary explains the temporal part - it must have “a certain degree of permanence i.e. if it is not of a purely temporary nature”.

In HMRC’s view this means that the place of business should stay in the same place for a sufficient length of time.

It may be argued that a semi-submersible drilling rig continuously engaged in exploration work at different spots within a single licence area also has the required link. Paragraph 5.1 of the Commentary permits movement from one location to another if it constitutes a ‘coherent whole commercially & geographically with respect to that business’. Drilling for one oil company customer in the one field would meet this test in HMRC’s view. Given the time normally taken to drill an exploration well (say one month) it will be apparent that it would be necessary to aggregate the time spent on a number of such wells before a semi-submersible drilling rig could be regarded as a fixed place of business.

Some semi-submersible drilling rigs have carried out tender assisted drilling in the UK sector of the North Sea which involves being attached to a fixed production platform. This could constitute being fixed.

Drilling operations may constitute a construction project under Article 5(3) of the OECD Model Convention. The Commentary at paragraph 17 notes that “construction includes not only the construction of buildings but also the construction of roads, bridges or canals, the laying of pipe-lines and excavating and dredging”. The construction of a vertical pipeline - which is what a semi-submersible drilling rig could be viewed as doing - is closely analogous to the construction of a horizontal pipeline. The issues considered in OT41540 will be relevant.

As regards the necessity of a detailed examination of working arrangements see the final paragraph of OT41630.