AFX Europe (Focus): UK oil companies should brace themselves for tax raid - Ernst & Young: “North Sea oil companies, such as oil giants BP PLC and Royal Dutch Shell PLC, should brace themselves for tax hikes in this year's pre-budget report as the government looks to address its mounting debt burden, a leading accountancy firm said today.”: Friday 28 October 2005

LONDON (AFX) - North Sea oil companies, such as oil giants BP PLC and Royal Dutch Shell PLC, should brace themselves for tax hikes in this year's pre-budget report as the government looks to address its mounting debt burden, a leading accountancy firm said today.

Ernst & Young, which advises companies that control around 60 pct of North Sea oil output, reckons it is almost inevitable that the Chancellor of the Exchequer Gordon Brown will want to get his "fair share of economic rent" from oil companies as world oil prices stand at near historic highs.

"As pressure mounts for the Chancellor to come up with solutions to plug the 11 bln stg black hole in his public finances and the slowdown in consumer spending beds in for the winter, the oil companies are one of the most obvious targets for tax increases and fiscal change," said Derek Leith, head of oil taxation at Ernst & Young.

Leith said it would be damaging if Brown opted for a quick-fix windfall tax, adding that any change in the fiscal regime should take into account the fluctuating oil price environment over time.

Oil prices have more than doubled in the last couple of years to a peak above 70 usd a barrel earlier this year, generating calls for the government to reap some of the gains garnered by oil companies.

"If they are going to do something, then it should be something that lasts into the medium and long-term...with a view to the long term stability of a sector which is critical to the UK economy, ," he said.

"Thus if the current large price rises were reversed the effective tax rate would also come down," he added.

Oil companies have been a popular target for governments of whatever political persuasion for years and Leith argues the effects of the unexpected corporation tax increases, introduced in 2002, are still being felt.

"Corporation tax hikes, in recent years, have resulted in a very pronounced suspension of exploration activity and investment in producing fields, particularly by the super majors," he said.

In addition, Leith noted that through the complicated tax regime that currently exists, the government has already benefited from the surge in oil prices to the tune of over 5 bln stg. In the fiscal year 2005/6, he reckons oil tax revenues from the North Sea will be around 11 bln stg.

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