OT43300 - Non-residents working on the UK continental shelf: transfer pricing: bareboat charters - transfer pricing challenge

The day-rate paid by the oil company for drilling will be for both the rig/vessel and its operation. If the drilling contractor were to charter the rig from an independent company acting at arms length then both parties to the bareboat transaction would look to make the appropriate profit from that subsequent transaction:

• the rig owner has to recoup his capital investment over the economic life of the rig;
• but the drilling contractor would seek to drive down the price in order to leave themselves with more profit.

The fluctuations in day rates in the market and the integrated nature of the services for which the oil company is paying, pose a particular challenge for companies and tax authorities when it comes to establishing arms length rates for bareboat charters. Over a number of years a market will exhibit periods of both high and low profitability. Since most of the rigs operating on the UK Continental Shelf do so for only relatively short periods of time, it is important to have a consistent methodology for transfer pricing which can nevertheless take account of changes in underlying market conditions.