Further memorandum submitted by UKOOA
UKCS Rates of Return (Post-Tax) Flat, Despite
Rising Oil Prices
Increased Rates of Return have been cited as
the motivation for the recent tax increase on the UK Oil and Gas
industry. Whilst pre-tax rates of return have increased on the
back of higher oil prices, UKOOA's own analysis shows that rates
of return post tax have declined since 2002.
The Office of National Statistics (ONS) regularly
publishes details of the Rates of Return[10]
for the oil and gas sector. ONS follows the convention in reporting
Rates of Return on a pre-tax basis. However, in doing so it fails
to highlight that the UKCS is taxed at a much higher rate than
other industries, with marginal tax rates which now range from
50%-75% from 1 January, 2006.
UKOOA has made comparison of ONS Rate of Return
on both a pre-tax and post-tax basis for the UKCS over the last
decade which has been shared with HM Treasury. Despite the increase
in oil price since 2003, the post tax rate of return has declined
over the last five years. In large part, this reflects the tax
increase imposed on the UKCS in 2002; it demonstrates that even
before the latest tax increase in 2005, the fiscal regime was
already very effective in transferring economic rent to HM Treasury.
The continued decline of the post-tax Rate of Return also raises
concerns about the long term competitiveness of the basin, all
the more so when oil and gas prices have been rising.
It should also be noted that UKOOA has fundamental
reservations on the use of Rate of Return as a measure of profitability.
Economic measures are used to drive investment rather than accountancy
measures such as Rate of Return. UKOOA consider that ONS figures
understate the massive capital investment in the UKCS, leading
to an over estimation of the Rate of Return. In recognition of
this, ONS, on their website, express concern about the use of
this measure for the UKCS.
22 June 2006
10 This profitability measure is more usually referred
to as "Return on Capital Employed" (ROCE). It is an
accountancy measure calculated as the ratio of EBIT (Earnings
before Tax and Interest) to capital employed. Back
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