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HMRC internal manual

Oil Taxation Manual

Non-residents working on the UK continental shelf: transfer pricing: drilling operating structures

An oil company will often contract with a drilling service company for drilling services offshore, paying a day-rate (see OT43170). If that drilling contractor is non-resident, then it is chargeable to UK tax only under CTA2009\S1313. However this charges to tax only profits or gains from ‘exploration or exploitation activities’ (see OT40600) carried on in a designated area.

Where a rig (see OT43110) is bareboat chartered, HMRC accepts that the owner is not carrying on activities on the UK Continental Shelf so as to be chargeable to UK tax under CTA2009\S1313 (see OT40900). Most mobile rigs working on the UK Continental Shelf are not owned by the companies that operate them, but are bareboat chartered in to the operating company from an overseas owner within the world-wide group. The majority of mobile rigs are owned by a group member resident in a low-tax jurisdiction.

The charterer (operating company) who is within CTA2009\S1313 will claim a deduction for rig rentals in computing his profits from UK Continental Shelf operations chargeable under that provision. If those rentals overstate the correct arms length rates, HMRC will seek an appropriate adjustment to ensure the UK taxes the correct amount of profit. Not surprisingly, this bareboat chartering commonly gives rise to difficulties in the transfer pricing area.

For detailed consideration of the economic background to bareboat chartering on the UK Continental Shelf, see OT43160 - OT43300. For consideration of the applicability of OECD methods to the circumstances of bareboat charters on the UKCS, see OT43320+.