Designing the tax package
Close interest within Government in the particular taxation issues relating to the petroleum industry started in the later part of the 1960s. This did not directly concern North Sea oil and gas but the issues raised had a major infl uence on the structure of the tax package eventually introduced. The Inland Revenue had become concerned that the oil industry in the UK was paying little or no (UK) corporation tax despite its large-scale activities here. A detailed investigation of the causes was conducted, and eventually a substantial report was prepared and submitted to the Chancellor in February 1970. The reasons for the lack of tax payments in the UK were the effects of the tax and posted price systems in operation in the main oil producing countries overseas and the resulting transactions between the affi liates of the major oil companies. In these countries the profi ts for taxation purposes were determined by the employment of a posted price which by early 1970 was estimated to be about 25% above the free-market price. The posted price was used for transferring the crude oil to the UK affi liates, and the result was little or no profi t and frequently losses incurred by the downstream companies involved in refi ning, distribution and petrochemicals. The research by the Inland Revenue indicated that the loss of UK corporation tax from the operation of this mechanism was around £65 million per year.