FINANCE BILL 2001
CLAUSE 99 AND SCHEDULE 31: PRT: DETERMINATION OF UNRELIEVABLE FIELD LOSSES
SUMMARY
1. This clause and Schedule amend the petroleum revenue tax (PRT) rules relating to the calculation of unrelievable field losses. Their purpose is to prevent oil companies from exploiting a loophole in the rules by transferring their field interests and as a result obtaining more relief than would have arisen had no transfer taken place. Where there is a transfer of an interest in an oil field from 7 March 2001, any unrelievable field losses, which can be claimed in another field, will be capped so that they do not exceed the amount that would have arisen had no transfer occurred.
DETAILS OF THE CLAUSE
2. Subsection (1) replaces subsections (1) and (1A) of section 6 of the Oil Taxation Act 1975 with new subsections, 6(1), (1A), (1B), (1C) and (1D).
3. New subsection 6(1) defines an unrelievable field loss as the portion of an allowable loss, which cannot be relieved against assessable profits accruing from that field. The terms ?allowable loss? and ?unrelievable portion? are defined in new subsections 6(1B) and (1C) respectively.
4. New subsection 6(1A) makes subsection 6(1) subject to the existing subsections (5) to (9) of section 6 and Schedule 8 of the Oil Taxation Act 1975.
5. New subsection 6(1B) defines an allowable loss for the purposes of the section. A participator in an oil field has an allowable loss if the following conditions are met.
6. The first condition is that the loss must have accrued in any chargeable period from another field, referred to as the ?abandoned field?.
7. The second condition is that the person who has made the loss must either be the participator in the oil field in which the loss is claimed or (if the participator is a company) an associate of that participator. (An associated company is defined in the existing section 6(3).)
8. The third and fourth conditions are that the loss must have accrued to the person making the loss as a participator in the ?abandoned field?, and that that field must have ceased production.
9. New subsection 6(1C) defines the unrelievable portion of an allowable loss as that part of the loss which cannot be relieved under section 7 of the Oil Taxation Act 1975 (which provides rules for relieving allowable losses) against profits made by the person who made the loss.
10. The new subsection 6(1D) provides that the determination of the unrelievable part of the allowable loss is subject to Schedule 31 to the Finance Act 2001. This applies where there is a transfer of a participator's interest in a field, to which Parts II and III of Schedule 17 to the Finance Act 1980 do not apply. Parts II and III of Schedule 17 contain provisions so that the recipient of the transferred interest stands in the shoes of the transferor for PRT purposes.
11. Subsections (2) and (3) make certain consequential amendments to, respectively, section 6(2) of the Oil Taxation Act 1975 and section 113(2) of the Finance Act 1984, in the light of the amendments made by subsection (1).
12. Subsection (4) gives effect to Schedule 31. The Schedule contains rules for determining the unrelievable portion of an allowable loss where there is a transfer of a participator's interest in a field to which Parts II and III of Schedule 17 to the Finance Act 1980 do not apply.
13. Subsection (5) provides that the clause and Schedule come into force on Budget day.
DETAILS OF THE SCHEDULE
14. Subparagraph 1(1) of Schedule 31 sets out the three conditions which must be met for the Schedule to apply to the calculation of unrelievable field losses.
15. The first condition is that are there must have been a transfer of the whole or part of a participator's interest in an oil field.
16. The second condition is that the transfer is not subject to Parts II and III of Schedule 17 to the Finance Act 1980, and the agreement to transfer the field interest is completed on or after 7 March 2001. Such transfers are known as ?excluded transfers? - the term is defined in paragraph 2 of the Schedule.
17. The third condition is that an allowable loss from the abandoned field must have accrued to any one of the following:
- the participator transferring the whole or part of its interest in the field (?the old participator?, as defined in subparagraph 1(2));
- the participator receiving that interest or any part of it (?the new participator?, as defined in subparagraph 1(2));
- any participator who subsequently owns all or part of that interest (?a subsequent new owner?, as defined in paragraph 3).
18. Subparagraph 1(2) defines the terms ?old? and ?new participators?. It also defines two other terms. The term ?loss-maker? is given to the person who has made the allowable loss in the abandoned field. The term ?transferred interest? is given to the field interest, or part-interest, which is transferred.
19. Paragraph 2 defines an ?excluded transfer? (see 16 above).
20. Paragraph 3 defines ?a subsequent new owner? (see 17 above).
21. Paragraph 4 ensures that the Schedule does not apply to agreements or arrangements within paragraph 5 of Schedule 3 to the Oil Taxation Act 1975 (where a licensee's interest in a field is in effect assumed by an associated company, a transaction often known as an ?illustrative agreement?); nor to re-determinations under a unitisation agreement (where, broadly, a re-apportionment of the oil from the field between different licensed areas is necessary).
22. Paragraph 5 provides that an allowable unrelievable field loss is determined in accordance with this Schedule where the conditions in subparagraph 1(1) of the Schedule are met, rather than in accordance with new section 6(1C).
23. Paragraph 6 sets out the general rule for determining the allowable unrelievable field loss.
24. Subparagraph 6(1) provides that the unrelievable portion of an allowable loss is that part of the intermediate unrelieved loss which cannot be relived under paragraph 7 of the Schedule against relevant profits.
25. Subparagraph 6(2) defines the terms ?intermediate unrelieved loss? and ?relevant profits?. The ?intermediate unrelieved loss? is that part of a loss which the loss-maker cannot relieve against the net assessable profits it has made in that field.
26. The ?relevant profits? are the net assessable profits accruing to different owners (defined in subparagraph 7(3) of the Schedule - see 31 below) of the loss maker's interest (defined in subparagraph 7(4) of the Schedule - see 32 below). Where those profits have been reduced by claiming expenditure unrelated to the field, those reliefs and allowances are ?added back? to the relevant profits if they were claimed on or after 29 November 1994.
27. Subparagraph 6(3) gives the term ?expenditure unrelated to the field? the definition in section 6(9) of the Oil Taxation Act 1975, which is abortive exploration expenditure, exploration and appraisal expenditure in other fields, research expenditure, unrelievable field losses from other fields and cross-field allowances.
28. Paragraph 7 provides for an intermediate unrelieved loss to be relieved against relevant profits made by other participators.
29. Subparagraph 7(1) provides that the intermediate unrelieved loss shall be relieved against the profits of a different owner, but only for the purpose of determining what is allowable as an unrelievable loss under this Schedule.
30. Subparagraph 7(2) introduces paragraphs 8 to 10 of the Schedule.
31. Subparagraph 7(3) defines ?a different owner? as any other participator who has owned all or part of the loss-maker's interest at any time, whether before or after the loss-maker.
32. Subparagraph 7(4) defines the ?loss-maker's interest? as the whole of the transferred interest (as defined in subparagraph 1(2) - see 18 above), or, if the loss-maker only ever has part of it, that part.
33. Paragraph 8 details the extent to which losses are to be relieved against relevant profits.
34. Subparagraph 8(1) provides for the case where the interest of the different owner is the same as that of the loss-maker. All the relevant profits of the different owner must be relieved.
35. Subparagraph 8(2) provides that where a different owner owns only part of the loss-maker's interest, only those of its relevant profits which relate to that part must be relieved.
36. Subparagraph 8(3) provides that where a loss-maker's interest in the field forms only part of a different owner's interest, again only those of the different owner's relevant profits which relate to the loss-maker's interest must be relieved.
37. Subparagraphs 8(4) and (5) provide for the case where, as the result of a transfer, the interest owned by the different owner partly overlaps the loss-maker's interest, but the loss-maker's interest is larger than that of the overlap. Only those of the different owner's relevant profits which relate to the part of its interest owned by the loss-maker must be relieved.
38. Paragraph 9 provides that relevant profits should not be relieved more than once. For example, a participator might have an unrelievable field loss in more than one chargeable period. Where an offset has already been made against relevant profits in one period, no further offset against those profits is required in any following periods.
39. Paragraph 10 covers the possibility that unrelievable field losses may accrue to more than one participator in the field.
40. Subparagraph 10(1) provides in such cases that the unrelievable field losses should be offset against the relevant profits of other owners of the transferred field interest in the order that those losses arise, i.e. an earlier unrelievable loss would be capped in precedence to a later one.
41. Subparagraph 10(2) provides that where the unrelievable losses arise at the same time, but to two or more participators in respect of the same transferred interest, the offset against relevant profits accruing to a different owner of the transferred interest is made in such a way that the profits are relieved in amounts equivalent to the interests held by the loss-makers.
42. Subparagraph 10(3) clarifies the meaning of ?an unrelieved loss accruing to a person?.
43. Paragraph 11 provides that the Schedule is to be construed as one with Part I of the Oil Taxation Act 1975.
BACKGROUND NOTE
44. The purpose of the amendments to section 6 of the Oil Taxation Act 1975, and the new Schedule 31, is to prevent oil companies obtaining more PRT relief in respect of unrelievable field losses, by transferring their interests in oil fields, than they would have obtained had no such transfers occurred.
45. PRT is a field-based tax, with each separate oil field being assessed for tax separately. Expenditure incurred in finding, developing and exploiting a field is generally allowable in calculating a company's assessable profits in that field. In addition, the cost of decommissioning assets used in the field is also generally allowable. Where an oil company incurs decommissioning expenditure at the end of a field's life, it can be used to offset profits made earlier in the life of the field, or if it exceeds those earlier profits, it can be used, as an unrelievable field loss, to offset profits made in other fields in order to obtain a repayment of PRT.
46. Oil companies in some fields pay little or no PRT, even though those fields in principle are subject to the tax. This is because the PRT regime includes a number of reliefs and allowances which are designed to ensure that the tax does not impact unfairly on smaller or more marginally economic fields.
47. Oil allowance, which effectively gives companies a tax-free slice of production for at least ten years of a field's life (and probably rather longer), is one of these reliefs. It is given after all other reliefs (apart from safeguard), so any losses carried back against a previous period must first offset any oil allowance given in that period before expenditure.
48. Consequently, the decommissioning losses mentioned above may not actually generate a PRT repayment. There may be sufficient profits in earlier periods to absorb the losses, and if no PRT has been paid on any of those profits because of the availability of oil allowance, no repayment is due.
49. There are special PRT rules relating to transfers of field interests. The basic principle is that the new participator in the oil field inherits the PRT history of the old. So losses unused by an old participator are passed on to its successor. And where a new participator makes losses at the end of a field life, those losses, once they have been set against its own profits in earlier periods, must be relieved against the profits of any company that has previously held its field interest.
50. However, it is possible for the old and new participators to elect jointly to disapply those rules so that the new participator does not inherit the old participator's field history. The Board can only reject a timely election where opt-out from the usual transfer rules will have a material effect on the PRT payable in the field.
51. The loophole closed by the new legislation arose from the ability of oil companies to use opt-outs to generate unrelievable field losses after transferring their field interests. If, for example, a company which had made a profit from a field but had paid little or no PRT because of oil allowance, transferred its interest in that field to another company just prior to decommissioning, an opt-out would enable the second company to claim the decommissioning loss as an unrelievable field loss; there would be no requirement for the loss to be carried back against the first company's profits. As the unrelievable field loss would be used to reduce the profits of the second company in another field, and not the field in which the transfer had occurred, there would be no grounds for the Board to refuse the opt-out.
52. The loophole could also arise earlier in field life. Where no PRT was expected to be paid in a field because of oil allowance, an opt-out transfer, made before the oil company had broken even in that field, enabled it to freeze its loss and claim it later as an unrelievable field loss, even though its successor might have subsequently made profits in the field, which would have absorbed the losses had the normal transfer rules applied.
53. The amended clause and new Schedule close the loophole by ensuring that any unrelievable field loss that accrues to an oil company from its interest in a field should not exceed the amount that would have accrued had there been no transfer of that field interest. The new legislation does not however catch transfers completed before 7 March 2001 to which an opt-out applies.
54. The following example illustrates how the provisions work. If participator X has made an excluded transfer of its interest in a field to participator Y, having made assessable profits of £100m (after non-field expenditure of £20m), and Y then makes a net allowable loss of £130m, Y's allowable unrelievable field loss computed under the Schedule is reduced to £10m. The £130m loss has to be offset against Y's ?relevant profits? of £120m.
55. While the yield from these measures is expected to be negligible, they ensure that PRT will be protected from significant potential future losses when oil installations are decommissioned, as well as potential future losses arising from transfers earlier in field life.