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HMRC internal manual

Oil Taxation Manual

Non-residents working on the UK continental shelf: computation of profits: mobilisation and demobilisation fees

The LB Oil & Gas approach to the tax treatment of mobilisation or demobilisation fees (see OT42380), and related expenses is based on the advice of the 1984 OECD working party on the taxation of offshore exploratory drilling activities. The working party reached the conclusion that income derived in respect of preliminary work carried out in another country, before the establishment of the permanent establishment, cannot be attributable to the permanent establishment and should not be taxed in the country of the permanent establishment. In reaching this conclusion it was influenced by the wording of the commentary on installation projects in the OECD Model Tax Convention on Income and Capital. Paragraph 19 of the commentary on Article 5(3) states that ‘a site exists from the date on which the contractor begins his work, including any preparatory work, in the country where the construction is to be established…….’. Though the quote refers to construction, the working party considered that it is probably valid to generalise from construction to other types of activity.

The LB Oil & Gas approach is also governed by the terms of the offshore activities article in any relevant treaty, an example of which is given by Article 23 of the UK/Norway Double Taxation Convention, paragraph (3), which provides that ‘An enterprise of a Contracting State which carries on offshore activities in the other Contracting State shall, subject to paragraphs (5) and (6) of this Article, be deemed to be carrying on business in that other State through a permanent establishment situated therein’.

In the light of the above background, the LB Oil & Gas view is that it is only from the date on which the non-resident contractor begins to actually carry out offshore activities on the UKCS that it can be regarded as having a deemed permanent establishment in the UK. Mobilisation activities which take place in order to put a vessel in the position of being able to undertake offshore activities on the UKCS (see OT42380) are not considered to be an offshore activity in the UK, and the fees and expenses related to them are not considered to be within the scope of UK tax. Different considerations apply where the non-resident contractor is already undertaking offshore activities in the UK or UKCS, and it carries out mobilisation and demobilisation activities in moving a vessel or rig from one location on the UKCS to another. In such circumstances, where it can be demonstrated that the fees and expenses related to such activities are properly attributable to the existing UK deemed permanent establishment (see OT42050), they are brought into the UK tax computation.

In rare cases there may be evidence that the mobilisation fee is not a true representation of the facts, and in those circumstances the LB Oil & Gas reserves the right to argue that the so-called mobilisation fee is unrelated to mobilisation.