Urgent reform of the oil and gas taxation regime is necessary in order to support investment, encourage exploration and ensure that the North Sea is a competitive investment location, according to Scotland’s Deputy First Minister John Swinney.
The support for the oil and gas sector as set out in the Autumn Statement 2014 was viewed by many in the industry as ‘insufficient’, said Swinney. The UK Government now has the chance to right a wrong and put in place a fiscal regime that is simpler, more transparent and fit for purpose.
The Scottish Government has set out three key priorities for fiscal reform:
- An immediate reversal of the 2011 increase in the Supplementary Charge.
- An investment allowance to provide a simple, stable and more competitive fiscal regime.
- An exploration tax credit to help increase exploration and sustain future production.
The Deputy First Minister has set out this call to action in a letter to the Chancellor ahead of Wednesday’s budget. In the letter he said:
“The oil and gas industry makes a valuable contribution to both the Scottish and UK economies and public finances. With the correct fiscal and regulatory framework it will continue to be a significant source of employment and economic activity for decades to come.
“Despite the industry’s vast potential, the recent fall in oil prices, coupled with a range of underlying challenges associated with a maturing basin present a number of challenges for the sector. This is reflected in the Oil & Gas UK Activity Survey 2015, which reported a sharp fall in exploration activity and a decline in future investment plans.
“We both agree that the sector itself needs to continue to take forward reforms to boost productivity and reduce costs. However, the Scottish Government has consistently called on the UK Government to undertake a fundamental change in the oil and gas fiscal regime. Recent events increase the urgency with which these reforms must be brought forward.
“The measures in the Autumn Statement 2014 were viewed by many as insufficient. Budget 2015 provides an opportunity to correct this, and put in place a fiscal regime that is simpler, more transparent, and fit for purpose.
“For the Budget to provide a credible response to the challenges facing the industry, it must firstly correct the damage done by the unexpected increase in the Supplementary Charge at the 2011 Budget. The underlying problem is that successive UK governments have placed too much emphasis on maximising the short term tax take from the industry. This has negatively impacted on business confidence, and undermines the industry’s need for a stable long term fiscal environment on which to base their investment decisions.
“The Scottish Government and the oil and gas industry have been clear that the 2 percentage point reduction in the Supplementary Charge at the Autumn Statement 2014 was not sufficient. The Budget must therefore deliver a permanent shift to a more competitive and predictable tax regime, which will allow investors to shift their focus away from fiscal risk and towards the significant investment opportunities that remain in the North Sea.
“Looking to the future I also believe that no major changes should be made to the North Sea fiscal regime without full consultation with the industry and key stakeholders such as the Scottish Government and the Oil and Gas Authority. In the Netherlands, the industry and government regularly meet to ensure greater transparency of fiscal policy decisions and more effective stewardship of the industry and the oil reserves. One of the major benefits of this approach is industry confidence in government decision making and I urge you to adopt a similar approach to North Sea fiscal policy.
“Secondly, we need to see substantial progress on the implementation of an investment allowance. I believe that an investment allowance, properly designed, can have a substantial impact in not only incentivising investment and future production, but also encouraging exploration rates and improving production efficiency.
“The Scottish Government submitted a response to your consultation on an investment allowance detailing our proposed approach for its design. This would provide a more encompassing allowance than the mechanism outlined in your consultation document and I urge you to adopt our proposal in the Budget.
“The investment allowance will be particularly effective in incentivising exploration rates if it is combined with an exploration tax credit.
“The exploration tax credit would equalise the tax relief provided to companies in a non-tax paying position with those in a tax paying position. It would provide companies with a credit against the Supplementary Charge and Ring Fenced Corporation Tax, amounting to the same level of relief that companies in a tax paying position currently receive. In combination, a well designed investment allowance and an exploration tax credit would provide a much needed boost to exploration and support future production.
“While there will be a need for further fiscal and regulatory reform beyond the Budget, the Scottish Government is clear that on the 18 March substantial fiscal reform is required. I urge you to make progress on the three initiatives I have outlined.”
Adapted from press release by Rosalie Starling