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HMRC internal manual

Oil Taxation Manual

Non-residents working on the UK continental shelf: transfer pricing: bareboat charter - comparable uncontrolled price

This is the first of the methods referred to in OT43320. The OECD Guidelines recognise that finding a comparable, uncontrolled price (CUP) provides the most direct and reliable means to apply the arm’s length principle.

However as rig contractors for the most part engage in transactions with related entities there are few third party comparisons available, although they are seen from time to time. In the absence of an open bareboat charter market there is little opportunity for companies to ascertain third party rates. Statements on behalf of a rig owner that rates are based on arms length comparisons are therefore examined critically and supporting evidence sought.

A drilling contract may give an idea of the way in which a day rate is made up as between the provision of the rig and the provision of drilling services. For example, it may have been necessary for the customer and the rig operator to break down the operating day rate to provide a basis for calculating escalation charges. Contracts should therefore be examined closely for any light they may throw upon the matter. However evidence must be interpreted with care since a notional break down of day rates may have been agreed by the customer as a matter of form only.

The rate which really matters to the customer is likely to be the global operating day rate rather than the way in which the operator chooses to apportion that figure internally.