Appendix
This memorandum provides the Government's response
to the conclusions and recommendations identified in the Scottish
Affairs Committee's report "Effects of tax increases on the
oil industry" (HC 35), which was published on 30 November
2007.
Introduction
1. The Government welcomes the Committee's Report
and its recommendations, which accord with the Government's own
objectives and its commitment to a strong and vibrant UK oil and
gas economy. Written evidence from HM Treasury was presented
to the Committee for its inquiry and officials from HM Treasury
and HM Revenue and Customs also appeared before the Committee
on 31 October 2006.
Response to Recommendations and Findings
RECOMMENDATION 1
We conclude that it is impossible to isolate with
certainty the impact of tax increases from that of other factors
such as price or initiatives designed to stimulate investment
or increase recovery, including the PILOT programme or the brown
field initiatives (paragraph
17).
2. The Government supports this conclusion. However,
it should be noted that the Government undertook a considerable
amount of analysis before it decided to increase the rate of the
supplementary charge from 1 January 2006 and the conclusion of
that analysis was that the impact on the industry, on investment
and more widely, was likely to be very small indeed.
RECOMMENDATION 2
In our view, the fiscal regime is unlikely to
be the most important factor driving investment decisions in major
fields. Although tax is clearly significant, the nature of the
oil and gas fields, the underlying geology and future oil and
gas prices are more likely to be the dominant drivers, but the
fiscal regime may be a factor affecting investment in older, more
marginal fields (paragraph 17).
3. The Government agrees that the underlying geology
and future oil and gas prices are the dominant drivers of investment
and hence ultimate recovery levels. The Government does, however,
have an important role to play in ensuring that the regulatory
and fiscal regimes help deliver the best possible future for the
UK continental shelf (UKCS).
RECOMMENDATION 3
There is a need to balance the return on investment
and the return to the UK taxpayer for the use of its natural resource
(paragraph 18).
4. The Government has twin objectives for the fiscal
regime - to promote investment and production whilst striking
the right balance between producers and consumers and ensuring
a fair return for the UK taxpayer from our natural resources.
RECOMMENDATION 4
We conclude that a simple fiscal regime that is
consistent and predictable would be of most benefit to the industry
and the UK in the long term (paragraph 22).
5. The Government agrees. It believes that overall
the current fiscal regime successfully strikes the right balance
referred to above and ensures that producers and consumers benefit
appropriately from the production of the UK's oil and gas reserves.
The consultation document "Securing a sustainable future:
a consultation on the North Sea Fiscal Regime" which the
Government published in December 2007 sets out a proposed package
of reforms to the fiscal regime that will improve certainty and
stability as well as helping to simplify the fiscal regime and
reduce administrative burdens.
RECOMMENDATION 5
We are heartened by the positive moves by the
Treasury to consult on the North Sea fiscal regime and by the
engagement of industry with that consultation (paragraph 25).
6. The Government welcomes the Committee's support
for its consultation on the North Sea fiscal regime. "Securing
a sustainable future" sets out the Government's conclusions
on the discussion process with the oil and gas industry and other
stakeholders to date, including a proposed package of reforms
to the fiscal regime, and will also form the basis for ongoing
discussions on outstanding issues.
RECOMMENDATION 6
Within the industry, there is clearly a perception
of instability and if there are to be further changes to the fiscal
regime they should seek to improve stability and predictability,
without harming the UK's already competitive position or depriving
the UK Government of a fair share in the economic rent from the
exploitation of its natural resources. Changes to the fiscal regime
should aim to make the system simpler to administer both for companies
and HM Revenue and Customs (paragraph 28).
7. The Government has published a set of criteria
that it considers it would be desirable any changes to the fiscal
regime meet. Any changes should:
- Promote investment and production
- Ensure a fair return for the UK taxpayer
- Be non-distortionary
- Be equitable
- Improve stability
- Be sustainable, and
- Reduce the administrative burden
The proposed package of reforms set out in the December
2007 consultation document was carefully assessed against these
criteria. They will help improve stability and provide certainty
to investors, as well as simplifying the fiscal regime and reducing
the administrative burden it imposes.
RECOMMENDATION 7
We urge the Government and the industry to engage
constructively in the current dialogue and to build on that dialogue
going forward once the current consultation comes to an end (paragraph
29).
8. The Government remains committed to promoting
a healthy and prosperous UK oil and gas industry. As part of this
commitment, the Government recognises the importance of continued
engagement with the oil and gas industry and other stakeholders.
Both BERR and HM Treasury Ministers already have regular meetings
with industry leaders. We recognise the expertise that those in
industry have in this area and believe the best future for the
North Sea fiscal regime can be achieved through close co-operation
and discussion.
Scotland Office
28 January 2008
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