Oil&gas companies are operating in a changed landscape, with a number of them no longer able to escape the effects of the global economic downturn and unprecedented market volatility.
The oil price remains at a critical level for capital investment decisions and the banking environment continues to be difficult.
Many of the UK’s businesses, not just oil&gas companies, have started 2009 in a much leaner position than in previous years. Organisations have had to quickly adapt to the volatile environment and reposition and restructure their businesses accordingly.
Combined with this, many UK oil&gas companies have grown up working in the North Sea. This geographic focus can be seen as a blessing and a curse.
The blessing is that it has given many businesses the skills that are needed in the new oil provinces where conditions are equally as tough as the North Sea.
The curse is that the basin is not going to produce the growth or margins a company needs to grow. So many Aberdeen and UK oil&gas businesses have, or are now experiencing, rapid growth away from the home market in the North Sea.
Against this backdrop of businesses becoming increasingly independent of the UK, and where cost savings and cash flow are king, the debate over the British tax regime and the need to provide a fairer and more competitive tax system is of even greater importance.
Recently, a significant number of UK companies have announced plans to leave in order to gain an advantage on their competitors. This consideration is largely driven by the weight and complexity of our domestic compliance burden and the desire to take advantage of lower tax rates and simpler tax regimes available abroad.
Concern exists that our tax regime is less attractive, and not just because of the headline tax rate. There are other important factors contributing to “tax competitiveness”, such as consistency of law and economic stability.
Indeed, The Netherlands, with its generally greater tax rate, has been ranked higher than the UK when companies were asked about countries with the most competitive and attractive tax regimes – largely due to its well developed system of advance rulings.
A primary differentiator between the British tax regime and those of other developed countries is the imposition of taxes on dividends received from foreign subsidiaries by the UK, particularly where a lower rate of tax was suffered in the overseas location.
This contrasts strongly with the policy of many other countries which exempt such dividend, thereby locking in the lower tax rates abroad. The UK Government has recognised this weakness and sought to resolve it by introducing an exemption system for foreign dividends from April, 2009.
However, even this advance comes with a sting in the tail in the shape of a worldwide debt cap that might not prove popular with corporate boards.
Another factor that has unsettled our companies is the volume of change in the British tax system. There are currently many other ongoing consultations for changes to the system that lead to uncertainty in the future tax that businesses will pay.
Added to this is the fact that the UK Government’s response to EU developments is seen by some as unwelcoming, with a tendency to minimise the extent of the changes required to reflect cases it loses, thereby failing to pass on existing benefits.
For a company seeking to make long-term plans in an uncertain world, the added uncertainty of how much tax its will pay can be a disincentive to remaining in the UK.
Migrating British companies have been subject to a so-called “exit charge”. UK legislation taxes all the unrealised gains of the exiting company based on the market value of its assets at the time of exit. Whether these are required in a context of a migration to the UK is currently uncertain.
There is a body of opinion that suggests that transfers within the EU should not be subject to the tax, under the freedom of establishment principle. However, this legislation still fulfils its purpose as a major disincentive to corporate mobility.
The UK is increasingly in competition in the global economy for all aspects of corporate affiliation. However much we analyse the mechanisms for corporate structural changes and the measures used to restrict them, the fundamental questions are about the UK economy and the retention of domestic jobs.
The British authorities and regulators must consider how best to respond to the climate of discontent among some of the leading wealth creators in UK industry that leads to the desire to get out.
The provision of a regulatory regime that is truly fit for purpose must be addressed.
The proposals to exempt dividends represent the UK Government’s views of how this might look. But with many other areas of uncertainty, this may not be sufficient to change the trend.
Is it now time to consider a radical rethink on our corporate tax regime to move it towards the European standard model, which is based on codified law?
Perhaps we need to reconsider the ideal set out by Adam Smith more than two centuries ago in his famous work, The Wealth of Nations, in which he promoted the economic virtues of a system with certainty, efficiency, fairness and simplicity at its core.
Colin Pearson is a tax partner based in Ernst & Young’s Aberdeen office
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