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HMRC internal manual

Oil Taxation Manual

Non-residents working on the UK continental shelf: transfer pricing: bareboat charter - cost plus method

This is the third of the methods referred to at OT43320. It takes as the arm’s length price the suppliers’ costs to which an appropriate mark up is added. Paragraph 2.32 of the OECD Guidelines recommends this method for ascertaining the income of a company where limited services are provided to other group members which support the group’s core activity although the company itself is not pivotal to the earning of profits:

  • this method is very unlikely to be appropriate to ascertain the profit of a rig operator;
  • its income is already known - the day-rate paid by the independent oil company;
  • the operator is an integral part of the drilling operation and the earning of profits for the group.

Theoretically, this method could be used to ascertain the income of the rig owner and hence the cost of the bareboat charter to the operator as they are supplying the asset to another group member. However, HMRC accept the supply of the rig is generally also an integral part of the services supplied to the oil company and therefore it would be inappropriate to base the whole reward to the rig owner on a return on its capital and other costs.