Author Archives: Pete Hawkins

06 Mar 2024

Spring Budget 2024

The Chancellor delivered the Spring Budget 2024 today.  We summarise below the announcements that were made on the specific rules that may be relevant to UK upstream oil and gas companies.

Extension of Energy Profits Levy

The Government announced that the Energy Profits Levy will be extended for 12 months so that it will now apply to 31 March 2029.  The change results in additional tax receipts of £1.53bn.  The Chancellor justified the extension by stating that the higher energy price environment was now expected to last longer.

The current system of investment expenditure incentives was confirmed as continuing to apply.

Documents published alongside the Spring Budget state this extension will not be included in the Spring Finance Bill 2024 but will be included in a future Finance Bill.  Therefore, this extension will not be substantively enacted for accounting purposes as the Spring Finance Bill 2024 passes through Parliament.  When this proposal will be substantively enacted for accounting purposes is therefore unclear.

Energy Security Investment Mechanism (‘ESIM’)

The Government announced at Autumn Statement that the ESIM, through which the Energy Profits Levy (EPL) will be terminated early in the event oil and gas prices fall below a threshold, will be legislated.  Spring Budget confirmed that intention and published a revised policy paper setting out the proposals.  The proposals do not appear to have changed since Autumn Statement.

Therefore, the threshold prices are $71.40/barrel for oil and £0.54/therm for gas. These threshold prices will be indexed annually from 1 April 2024 using the preceding December’s Consumer Prices Index. The ESIM will trigger the abolition of EPL from the last day of the 6-month rolling reference period, when both oil and gas average prices in the 6 months have fallen below the threshold.

The legislation enacting this change will be enabled by a change to the Energy Profits Levy Act 2022 provided by the Spring Finance Bill 2024 with the details of the ESIM included in Regulations.

The costing for the ESIM has been published.  There is no cost to Government for implementing this proposal.  This indicates, not unsurprisingly given the design of the ESIM, that the current expectations on oil and gas prices mean the ESIM will not trigger.

Full expensing for leased assets

In Budget 2023, the Government announced that certain expenditure on plant and machinery could qualify for full tax relief at 100%.  However, the plant and machinery needed to be new and unused and could not be acquired for leasing.

At Spring Budget 2024, the Government announced that it would seek to extend full expensing for assets acquired for leasing but that those changes would only apply when “fiscal conditions allow”.  Draft legislation and consultation is expected shortly.


The extension of EPL is very disappointing, as once again there is a negative change to the UK’s fiscal regime for oil and gas.  Government time and again promised that EPL would end on 31 March 2028. This undertaking was most recently reiterated in the HM Treasury document published at the time of the 2023 Autumn Statement setting out the outcome and summary responses to the Oil and Gas Fiscal Review which stated “By confirming the EPL will end in March 2028 at the latest, the government provides certainty in the medium-term…….”.

Sentiment will be damaged once again.

CW Energy LLP
March 2024

09 Feb 2024

Green Investment Pledge

The Labour Party announced on 8 February that they are dropping their pledge to spend £28bn per year on “green investment”.

As part of the briefings around this announcement, the following comments on the windfall tax were reported in the Press.

Labour will introduce a proper windfall tax on the excess profits of oil and gas companies, o we can invest in the clean power we need to cut bills for families.

Labour will fix the holes in the Energy Profits Levy by:

  • Increasing the rate to 78%, the same rate of tax as in Norway.
  • Ending the loopholes in the levy that funnel billions back to oil and gas giants.
  • Extend the sunset clause in the windfall tax until the end of the next parliament, provided there continue to be windfall profits.

Together, these changes would raise £10.8bn over the next five years from 2024-25 to help fund the Green Prosperity Plan.

This amount is based on current OBR forecasts. The amount raised will depend on outturn oil and gas prices and production levels, as well as the level of investment and the amount offset against taxation.

Of course, there is no guarantee that these measures will be introduced if Labour are elected this year.

The 78% rate is not new, but interestingly Labour has in the past said that the tax will be “backdated”, but this pledge was not part of the briefing.

22 Nov 2023

Autumn Statement 2023

The Chancellor delivered the Autumn Statement 2023 today.  We summarise below the announcements that were made on the specific rules that apply to UK upstream oil and gas companies.

Energy Security Investment Mechanism (‘ESIM’)

The Government announced today that the ESIM, through which the Energy Profits Levy (EPL) will be terminated early in the event oil and gas prices fall below a threshold, will be legislated.  It also clarified how those threshold prices would be measured.

The ESIM was announced earlier this year without any undertaking to legislate the termination of the EPL. Today’s announcement reflects the industry’s request for certainty.

The ESIM will trigger the abolition of EPL from the last day of the 6-month rolling reference period when both oil and gas average prices in the six months have fallen below the threshold.

The announcement clarifies the pricing sources and the methodology for arriving at the average.

Currently, the threshold prices are $71.40/barrel for oil and £0.54/therm for gas. These threshold prices will be indexed annually from 1 April 2024 using the preceding December’s Consumer Prices Index.

Outcome from the Oil and Gas Fiscal Review

During the Summer, the government conducted a review of oil and gas taxation.  The outcome of this review and summary of responses was published today.  There are two main areas covered being:

  • Tax regime design for oil price “shocks”; and
  • Payment to decommissioning funds and tax treatment of assets repurposed for Carbon Capture, Usage and Storage (‘CCUS’)

Tax regime design for oil price “shocks”

The government stated that it was recognised that there was a need for certainty and predictability in the oil and gas fiscal regime.  But also noted that in periods of high oil prices the nation needed a “fair return”.  Therefore, where there are “unusually high oil and gas prices the government will develop a new mechanism that could be used to respond to such price shocks post-2028”. The government have given an undertaking to provide details of how “price shocks” are to be defined before EPL is abolished.

The government is signalling that they understand that the introduction of the EPL was a “shock” tax rate rise and was not helpful for the industry, stating that the mechanism should work in a “more predictable way, in order to not deter investment”.

There are no details on how such a mechanism could be framed but that the “government will need to consider a range of factors before deciding whether to introduce such a mechanism, including the economic and fiscal context of the day.”

Outside of these high oil price periods, the review stated that the government considered the tax regime to be effective with limited scope for simplification changes.

Payment to decommissioning funds and tax treatment of assets repurposed for CCUS.

At Spring Budget 2023, it was announced that legislation will be introduced in a future Finance Bill that will establish “the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of oil and gas assets for use in CCUS projects”.  At that time, there was no further detail included, so it was not clear what tax treatment is being proposed.

At Autumn Statement, it was announced “targeted support for the energy transition through allowing relief for payments made by oil and gas companies into decommissioning funds in relation to oil and gas assets that are repurposed for use in Carbon Capture Usage and Storage”.  The support consists of two measures:

  • Provides for tax relief where oil companies make a payment to a decommissioning fund. Under current law, relief is only available at the time that decommissioning expenditure is incurred when the decommissioning work is carried out, and
  • Remove from the charge to EPL any “receipts” that are received when an asset is repurposed for use in a CCUS project. Receipts will remain subject to RFCT and SCT.

It was noted that the government “did not receive sufficient evidence on any other significant barriers to the energy transition in the oil and gas tax regime in order to justify further changes in the oil and gas tax regime” but acknowledged this will be kept under review.

This leaves repurposed CCUS assets subject to a 40% clawback.


Legislating the ESIM is a welcome response to the industry’s concerns, but for those companies anticipating EPL losses to be used on carry-back, an early end to EPL will deny them relief. It is disappointing that the government has rejected the request by industry for the thresholds to reflect indexed historical prices.

The Oil and Gas Fiscal Review has not provided anything tangible at this stage with respect to the design mechanism for oil price “shocks”, and therefore, the industry will need to continue to engage in shaping the design of any mechanism.  Many will be comforted that the current fiscal regime has been found to be effective so that there appears to be limited risk for further changes.

The CCUS announcement leaves a potentially significant roadblock in place where an asset is sold, and receipts are still to be subject to 40% taxation.  Perhaps further changes may be acceptable to the government as the precise framework of the CCUS contracting structures is further developed.

CW Energy LLP

November 2023


10 Jul 2023

Scope of the ring-fence decision published

Court of Appeal decision published in the Royal Bank of Canada case

In March 2022. we published a newsletter on the Upper Tribunal (‘UT’) decision that considered whether an oil and gas “royalty” interest held by a non-UK resident (Royal Bank of Canada (‘RBC’)) gave rise to ring-fence income and whether the relevant treaty allowed HMRC to tax the income.

The UT decided in favour of HMRC, and RBC was held to be liable to UK ring fence corporation tax on receipt of the payments, notwithstanding the Canada/UK tax treaty. Our newsletter on the UT decision can be found here:

RBC has since appealed against that decision. The Court of Appeal heard the appeal in May, with the decision published on 21 June 2023.  The Court of Appeal found unanimously for the taxpayer and overruled the decision of the UT.  The leading judgement was delivered by Lady Justice Falk (a former Freshfields tax partner).

Application of the Canada/UK tax treaty: Nature of RBC’s rights

RBC succeeded in its argument that the receipts were not income derived from immovable property: they were not rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. RBC had never held the underlying immovable property.

The Court of Appeal was not persuaded by earlier judgements that the precise legal structure should be looked through to the commercial arrangements saying:

“That legal structure cannot simply be ignored on the basis of some broader concept of commercial or economic reality.”

As the right to work the Buchan field was contained in the licence interest and that interest was never held by the former owner or RBC it could not be said that the payments were received by RBC in consideration for that “right to work”. The Court of Appeal held that the characteristic of the former owner of the right to receive payments did not pass to RBC.  That meant the payments should not be taxed as either income or capital gains due to the application of the treaty.

Some of the UK’s treaties will provide similar protection to that provided by the UK-Canada treaty. However, where the treaty includes an offshore activities article, it is likely that similar protection may not be available.

UK domestic law

As the Court of Appeal found that the UK had not reserved its taxing right, that dealt with the matter under appeal, and Lady Justice Falk said she would “prefer not to express a concluded view” on the UK domestic law position.  However, she also made it clear that she was not necessarily supportive of the position of the lower courts by stating:

“it is not clear to me that an interest in a proportion of sale proceeds from oil of the kind in issue here can properly be described as “the benefit of” the oil, as opposed to being a benefit deriving from proceeds of sales of oil made by BP or Talisman.”

Comments on deduction of royalty payment

Where the payments of this nature have not been structured as instalments of capital, it is common in the industry for ongoing payments to be treated as deductible.  HMRC clearances have been obtained routinely following this treatment which is included in published HMRC guidance on taxation of deferred consideration.

However, this judgement included comments in respect of the tax treatment of the company making such payments:

“…it would ordinarily be expected that the consideration paid, including the Payments, would form part of BP’s acquisition cost for chargeable gains purposes. For whatever reason, HMRC appears to have taken a different approach and to have treated the Payments made, initially by BP and then by Talisman, not as part of their acquisition cost of Sulpetro’s interest in the Buchan field but as deductible revenue payments. I cannot comment on the possible basis for that, but what is clear is that the fact that a particular tax treatment has been afforded to the payer and has subsequently given rise to a concern about the impact of those deductions on the UK tax take.., cannot determine the tax treatment of the payee.”

We believe that these comments simply reiterate the established position that a payer’s tax treatment is not relevant when considering the tax treatment of the payee and should not be read as providing precedent on the deductibility or otherwise of royalty payments.


As the Court of Appeal has decided the case without the need to consider the domestic law taxing provisions in detail and has overruled the lower courts, this seems to leave the UK domestic law position without binding case law precedent on the fundamental issue of whether a royalty of this kind is an oil right.  There are, however, arguments and views included in the judgements which may be useful in determining how a future court may rule on these matters. In this sense, whilst the decision in the judgement was reached based on a narrow treaty point, the case does potentially have wider relevance for payers and recipients of royalties of this kind generally, including UK resident recipients.

HMRC may seek to seek leave to appeal this decision to the Supreme Court so this may not represent the final position.

CW Energy LLP
July 2023

15 Sep 2022

CWE under new ownership

After nearly five years of being part of the Ince group, Phil Greatrex and Paul Rogerson have reacquired the CWE business from Ince. There will be no changes to the running of the client-facing part of the business. All of the partners and staff of CWE will carry on in their original capacities and can be contacted using their existing details as set out on our website.

We are now looking forward to developing the business as an independent practice again.

Please contact Phil Greatrex ( or Paul Rogerson ( if you would like to discuss this announcement.

CW Energy LLP
September 2022

14 Jul 2022

Energy Profits Levy – now enacted

The Energy Profits Levy (EPL) rules have now been finalised, and the rules are contained in the Energy (Oil & Gas) Profits Levy Act 2022. The Act passed through the House of Commons stages on 11 July 2022 and received Royal Assent on 14 July 2022.

Our newsletter of 22 June 2022 ( referred to the consultation on the draft legislation, but the Bill as finalised reflects only two material changes of note.

Petroleum Revenue Tax

This change is to exclude from the EPL profits chargeable the amount of any CT income charged as a result of a repayment of Petroleum Revenue Tax to the extent the repayment is attributable to decommissioning expenditure, creating a PRT loss that is carried back.

The change addresses an anomaly we referred to in our Newsletter and at least means that whilst decommissioning expenditure is excluded from giving EPL relief, the PRT repayment derived from such expenditure should not be charged to EPL.

Certainty on expenditure qualifying for uplift

The original Bill included potentially very wide-ranging anti-avoidance wording that could have led companies to be concerned that any expenditure brought forward or incentivised by the 80% uplift could be caught by the anti-avoidance rules with the result that no uplift would be available.

These anti-avoidance rules have now been better targeted and should ensure that transactions that are commercially driven should not be barred from accessing the uplift.


The two changes noted are welcome.  However, there are areas that may be clarified further, for example, that electrification costs can qualify for EPL uplift.  We are expecting HMRC Guidance to be forthcoming and hopefully, this will cover these areas.

Companies should note that when the proposals were announced it was stated that the first instalment of EPL should be made with the last instalment payment.  This has not been included in the legislation and therefore, the instalment rules apply in the way they do for RFCT (but with a shorter accounting period for the straddling period).  Therefore a December year-end company should pay any tax due for the EPL period to 31 December 2022 on 8 December 2022 and 14 January 2023.

CW Energy LLP

14 July 2022

22 Jun 2022

Energy Profits Levy – draft legislation published for consultation

The Energy Profits Levy (EPL) draft legislation has now been published for consultation. The consultation period closes on 28 June 2022.

We understand that it is intended to have EPL enacted before the Summer recess but that the EPL legislation will not be substantively enacted for accounting purposes before 30 June 2022.

The comments below reflect the current draft, but we do not expect there to be much change given the compressed legislative timetable.

As expected the EPL applies to companies with ring fence trades and profits that would be chargeable to ring-fence tax. The EPL will therefore include relevant chargeable gains and PRT refunds.

The EPL will cover profits arising in accounting periods, or deemed accounting periods, starting from 26 May 2022 and ending on 31 December 2025.

The starting point for EPL is the company’s ring-fence profit or loss for a period, which will exclude any RFES, and is then adjusted to remove:

  • finance charges, determined using the SCT rules,
  • CT Losses brought forward, or back,
  • CT Group relief, and
  • Decommissioning expenditure.

An “additional deduction” is introduced as an uplift on so-called “investment expenditure” in the period. This is calculated as 80% of the relevant expenditure and counts as a deduction in computing the EPL profit/loss of the EPL period.

The rules include a bespoke EPL loss regime. EPL losses can be carried forward or carried back one year or surrendered as “EPL” group relief against EPL profits. If the ring-fence trade ceases, “EPL” terminal loss relief rules permit a three-year extended carry back against profits within the EPL regime.

The EPL profits and losses for accounting periods which straddle the 26 May 2022 and 31 December 2025 dates are to be apportioned on a just and reasonable basis except for investment expenditure which is to be apportioned with reference to when the expenditure was actually incurred (using the specific capital allowance rules on when expenditure is incurred). Overall we believe this approach will generate less difficulty than experienced when the Supplementary Charge rate was increased in 2011, where time apportionment was the default position adopted by the law.

The 80% uplift which generates the additional EPL deduction applies to investment expenditure as defined. This is broadly the type of expenditure on oil-related activities that qualify for investment allowance within the SCT regime, but unlike the SCT investment allowance, the expenditure does not have to relate to a defined oil field or Cluster Area. There is also no requirement for it to be “activated” with production income.

The definition covers not only capital expenditure but also some leasing costs and non-routine operating costs on facilities and wells that enhance production, reserves or tariff income. As with the rule for computing, EPL profits decommissioning and financing costs are specifically carved out from the uplift regime.

However, the 80% uplift is not available on ‘second-hand’ assets. The rules here are very broadly drafted and deny the allowance on any asset where it would have been possible for an uplift to have been claimed by a previous owner of the asset, on the assumption that EPL was in place at the time that the owner incurred the relevant costs. The legislation includes as an example expenditure on the acquisition of a field interest but would appear to apply to the acquisition of substantially all second-hand assets if previously held by a ring-fence company, including exploration licences.

There is no claw-back of any uplift on a transfer/sale of an asset but the new owner will not obtain the uplift on their acquisition cost, regardless of whether the seller actually obtained such uplift.

The rules also incorporate anti-avoidance specifically in regard to the 80% uplift and EPL losses for any avoidance arrangements with the main purpose of obtaining the uplift.

The rules provide for the normal CT machinery provisions to apply, including the instalment provisions, and a requirement to notify HMRC of the amount, on or before any EPL payments are made.


Overall the draft legislation is largely as expected based on the announcements last month.

The rules are generally tightly drawn. Companies will, in particular, need to look carefully at the transitional rules. There may also be some areas where companies can plan to mitigate their exposure. There does not seem to be anything in the draft which delays the instalment payments for December year-end companies until 14 January 2013 as previously announced.

The inclusion of ring-fence capital gains and PRT repayments appear particularly anomalous. Capital gains will be based on all future profits from the licence, capturing profits to be made after the sunset date of 31 December 2025. This is likely to deter any movement of field interests unless reinvestment or other reliefs can be found. For PRT repayments there is no relation to the excess profits through high prices that the levy is designed to catch. Indeed, the loss available to carry back will have already been reduced by the current high prices and is then being taxed again. Companies will no doubt be looking closely at whether this gives rise to a claim under the DRD.

CW Energy can assist companies in planning for and complying with the EPL.

CW Energy LLP
22 June 2022

23 Mar 2022

Spring Statement 2022

The Chancellor delivered the Spring Statement 2022 today.

Despite the speculation and calls for a windfall tax there was no announcement on any changes to the oil tax rates.  Therefore, the rates will continue to be those currently enacted being 30% for ring fence corporation tax and 10% for the supplementary charge to corporation tax.

In addition, there was no announcement on any changes to the calculation of profits chargeable to ring fence taxation.  Neither was oil and gas taxation mentioned in the Spring Statement Tax Plan.


While there have been many public statements in the last few weeks that HM Government were not considering changes to oil taxation it is welcome that the Chancellor has once again allowed a stable regime to remain in place.  This again is evidence that HM Government understands the importance of fiscal stability and should underpin the plan for more investment in UK domestic oil and gas production in these uncertain times in energy markets.

14 Mar 2022

Scope of the ring-fence: Result of the appeal in the Royal Bank of Canada case

In August 2020 we published a newsletter on a First-tier Tribunal (‘FTT’) case that considered whether an oil and gas royalty interest held by a non-UK resident gave rise to ring-fence income and whether the relevant treaty allowed HMRC to tax the income.  That newsletter can be found here:

As we reported at the time the taxpayer lost on both counts at the FFT and appealed. The appeal was heard by the Upper Tribunal (‘UT’) in December and the decision was published on 17 February 2022.  The UT confirmed the decision of the FTT on both the domestic law and treaty matters and consequently found that the royalty income was taxable as ring-fence income in the UK.

In terms of the treaty position, the UTT agreed that the oil royalty constituted “rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits…” and therefore fell within the definition of immovable property under the treaty.

The key domestic law finding in terms of the wider relevance of this decision is the UT’s decision on the meaning of the “benefit of” exploration or exploitation rights. There was very little analysis of the meaning of this term in the FTT decision, and unfortunately, there is not much more in the UT decision.

The UT found that the oil royalty constituted “rights to the benefit of the oil because, provided that the oil was sold at a sufficiently high price to generate a payment of the royalty, the Bank would thereby benefit from the oil produced..” and the reference to benefit “is capable of including a wide range of arrangements, whether proprietary or contractual or otherwise, giving rise to a benefit, including a commercial benefit.”

As a consequence, the UT dismissed the grounds for appeal and affirmed that the UK domestic tax rules would, based on the facts of this case, treat the income arising as subject to tax in the UK as ring-fence trading income.

One matter to note is that this is a UT decision and therefore does set legal precedent.

The implications for taxpayers are as we set out in our original newsletter when the FTT decision was published.  Taxpayers should review any similar arrangements already in place

Generally, we see royalties of the type considered in this case to be created as a result of the transfer of interests in oil fields. It may however to be possible to distinguish some forms of contingent deferred consideration from the royalty in this case.

In today’s oil and gas price environment mechanisms that share the benefit of price fluctuations have remained common in transactions.  Such mechanisms should be considered carefully.

CW Energy LLP
March 2022

09 Feb 2022

Proposed changes to taxation of profits for multinational groups – Pillar Two

In our newsletter in July 2021, we summarised and commented on the potential changes to the taxation of profits for multinational groups published by the OECD/G20.  That newsletter can be found here

The OECD issued a report at the end of December 2021 that sets out details on how Pillar Two rules are to be implemented (“Model Rules”).  Pillar Two deals with the Global Anti-Base Erosion (“GloBE”) rules which provides for the introduction of a minimum corporate tax rate of 15%.

On 11 January 2022 HM Treasury and HMRC issued a consultation document to seek input on the UK application of the Model Rules and wider implementation questions.

In early 2022, OECD is expected to issue further guidance on these rules and also will engage further with stakeholders to refine the Pillar One rules.

In this newsletter, we summarise and briefly comment on some of the key components of the Pillar Two Model Rules and relevant parts of the UK consultation.


Changes to the international tax rules had already been made through other BEPS (Base erosion and profit shifting) initiatives; however, it has been perceived that there remains a need for a broader change to address the possibility that companies could still shift profits to low tax jurisdictions.  Pillar Two seeks to ensure that large multi-jurisdictional businesses pay a minimum level of tax regardless of where they are headquartered, the jurisdictions they operate in, or where their profits are booked.

Where an “in scope” entity suffers a rate of tax lower than 15% in any jurisdiction the rules seek to identify this and levy a charge, normally in the group parent company, for the difference, thereby removing the advantage of shifting profits to low tax jurisdictions. The rules also allow a country that has implemented the rules to charge additional tax to bring their rate up to 15%, thereby preserving that jurisdiction’s primary right to levy taxes on income generated in its own jurisdiction.

Scope of the rules

The rules are to apply to multinational groups with annual global revenues greater than EUR 750m.  The value is taken from the consolidated financial statements of the parent entity.  For the rules to apply the EUR 750m revenue threshold needs to be met in at least two of the last four years preceding the year under consideration.  Therefore while the rules, at first sight, seem to replicate the scope of the Country-by Country Reporting rules they are slightly different.

If the multinational group is in scope, each entity in that group is subject to the rules.  There are some exclusions, e.g. not for profit organisations, pension funds and governmental organisations, but all multinational oil and gas and energy groups will be potentially affected if they meet the revenue threshold.

Pillar Two, however, applies only to multinational groups which means a group that includes solely UK tax resident companies with no foreign permanent establishments will not be subject to the rules.

Determining the rate of tax

The tax rate is determined by finding each entity’s “GloBE Income or Loss”, i.e. broadly profits, and its “Adjusted Covered Taxes”, i.e. the related tax liability for the period.  The values for each entity in the same jurisdiction are aggregated with an overall tax rate determined for each jurisdiction.

GloBE Income or Loss

Globe Income or Loss is found by taking the amount of income or loss that was included in the consolidated financial statements for each entity.  This amount is then subject to numerous adjustments.  For example, the following are to be adjusted:

  • Any accrued illegal payments;
  • Fines or penalties of EUR 50,000 or more;
  • Pension costs accrued and not paid;
  • Property, plant or equipment that has been revalued for accounting purposes but not sold;
  • Certain foreign currency gains or losses of an entity whose accounting and tax functional currencies are different;
  • Prior period errors and changes in accounting principles.

The starting point is therefore book profit and loss amounts and notably, the adjustments required to determine Globe Income or Loss do not include the items we would typically see being adjusted in a UK upstream oil company tax computation, such as add-back for depreciation, deduction for capital allowances and use of brought forward tax losses.  However, there are separate adjustments to be made to the calculation of Adjusted Covered Taxes in respect of temporary differences, i.e. profits and losses recognised in different periods for tax and accounting purposes (see below).

Gains and losses arising from the sale of greater than 10 per cent shareholdings and gains and losses in relation to a reorganisation where the gain or loss is deferred for local tax purposes are to be excluded.

However, a gain or loss on the disposal of an interest in an oil field would not seemingly be covered by the exclusions and potentially any gain arising would constitute GloBE income even though any gain may be exempt from tax where reinvestment relief applies.

Substance-based Income Exclusion Carve Out

In order to seek to include only “excess profits” of a company in the rules, GloBE Income is to be reduced by two further amounts:

  • A payroll carve out at 5 per cent of the payroll costs of employees of the entity; and
  • A tangible asset carve out at 5 per cent of the book value of relevant assets. Such assets are stated to include property, plant and equipment and also natural resources.

There are transitional rules which allow higher rates to apply for the first ten years.

Adjusted Covered Taxes

Adjusted Covered Taxes is found by taking the amount of current tax expense accrued in the financial accounts for taxes levied, broadly, on the entity’s income or profits.

We would expect in scope taxes to include both PRT and SCT and also other oil tax regimes such as Norway’s special tax, Netherlands’ state profit share and Denmark’s hydrocarbon tax.

In addition, taxes imposed in lieu of a generally applicable corporate income tax are also included.  This is expected to cover petroleum sharing contracts where tax is often paid by the host state on behalf of the oil company out of the state’s share of oil.

In quantifying the amount of current tax expense in any year it appears this will be the amount of tax that has or will be included in a submitted tax computation as the amount of current tax expense that relates to an uncertain tax position is to be excluded until that tax has been paid.

Deferred tax expense is to be included in the calculation of Adjusted Covered Taxes.  Where there is a deferred tax expense the tax rate used to calculate deferred tax is to be recast, in most cases, downwards so that deferred tax cannot be recognised at a rate above 15%. Deferred tax credits will also be recognised at a rate restricted to 15%.

There are multiple further adjustments that should be made, with perhaps the most significant being an adjustment to the deferred tax being removed from the calculation of Adjusted Covered Taxes if a deferred tax liability is not “recaptured pursuant to this article” within five years.  This appears to mean the deferred tax liability must have “reversed” within five years or the Adjusted Covered Taxes amount is reassessed for the year the deferred tax expense was included. This five-year rule does not apply where the deferred tax meets the definition of “Recapture Exception Accrual” which means tax expense is attributable to certain items including:

  • Cost recovery allowances on tangible assets;
  • The cost of a licence or similar arrangement from the government for the use of immovable property or exploitation of natural resources that entails significant investment in tangible assets; and
  • De-commissioning and remediation expenses.


These items are not further defined in the report.  On the face of it, this may mean that deferred tax charges made for items such as accelerated capital allowances on-field development costs may not be subject to the five-year rule.


De minimis exception

A group may elect on an annual basis for the rules not to apply to certain jurisdictions where the entities in that jurisdiction have both:

  • average GloBE revenue (broadly, the revenue included in the consolidated accounts for that jurisdiction) of less than EUR 10 million; and
  • average GloBE income (calculated as set out above) is a loss or is less than EUR 1 million.

The average is calculated by taking the current and preceding two years of GloBE revenue and GloBE income.

There is also reference to a “GloBE Safe Harbour”.  It appears that details of this exclusion are to be included in the GloBE Implementation Framework which has yet to be published.

From the UK consultation document, it appears the GloBE Safe Harbour may use the country by country (CBCR) filings (with some adjustments) to identify if there is a lower risk of a particular jurisdiction being subject to tax below the minimum rate.  This safe harbour approach may remove the need to undergo a full set of calculations for a safe harbour jurisdiction.

Transitional rules

In the first year that an entity comes within the scope of the GloBE rules, the entity is to take account of all deferred tax assets and liabilities reflected or disclosed in the financial accounts in arriving at the Adjusted Covered Tax.  The impact of any valuation adjustment (where the full deferred tax asset is not recognised) is disregarded so that the utilisation of losses that were unrecognised for deferred tax purposes are taken into account in determining the tax charge.

Charging provisions

Where a tax rate has been found that is below the 15% minimum tax rate then a top-up tax is to be charged (called Income Inclusion Rule).  This is usually levied by the tax jurisdiction of the parent company of the group.  Where the tax jurisdiction of the parent company of the group has not implemented the GloBE rules then a jurisdiction further down the ownership chain may levy the top-up tax.  The rules use a top-down approach so that, for example, if the jurisdiction of the parent company of the group does not operate the GloBE rules but an immediate subsidiary is in a jurisdiction that has implemented the rules then it is that jurisdiction that charges the top-up tax.

Where there is still tax to pay then another mechanism may apply (called the Undertaxed Profits Rule) which would arise if the parent company of the group is not subject to the Income Inclusion Rule and the top-up tax has not been collected by other jurisdictions (e.g. where none of the companies in the ownership chain is in jurisdictions that have implemented the GloBE rules), the remaining top-up tax is charged by jurisdictions that have group entities and have adopted the GloBE rules. The amount of tax charged by each jurisdiction is based on the relative size of the group’s entities measured by tangible assets and the number of employees.

UK domestic minimum tax

The UK consultation document includes a section on the possibility that the UK will implement a domestic taxation rule that would apply to charge income to UK taxation under domestic law if the Pillar 2 rules would otherwise apply in respect of UK activities.  The consultation states that absent a domestic minimum tax, these rules will mean low tax profits in the UK will likely be topped up in foreign jurisdictions.  This domestic minimum taxation would be designed to ensure tax flows to the UK rather than a foreign jurisdiction.

UK implementation timing

The UK consultation is open until 4 April 2022 with the draft legislation to be published in summer 2022.  It is expected the legislation will be included in Finance Bill 2022-2023 and have effect from 1 April 2023.  The Undertaxed Profits Rule and domestic minimum tax rule (if implemented) would be introduced from 1 April 2024 at the earliest.


The Model Rules include many concepts which were not set out in earlier papers and reports.  The OECD guidance, when published, should hopefully set out in more detail how some of these concepts and calculations are expected to work.  In addition, the UK consultation and legislative process will provide more clarity.  However, we do now know that these rules will be complex and for the proposals to work effectively, will need to be implemented cohesively across all relevant jurisdictions that have signed up.

For upstream oil and gas operations in the UK, one would expect that the rules should not be relevant due to the high rate of tax applicable to UK upstream companies.  However, there are some instances where there is a possibility that the rules could apply.  For example, on the refund of PRT, the repayment interest is not taxable which may result in a reduced effective tax rate.  Where decommissioning losses are carried back the credit to current tax may be greater than the associated capped deferred tax charge thereby also reducing the effective tax rate unduly.  Where reinvestment relief applies to field disposals this may also give rise to a tax charge below the minimum rate.  The utilisation of losses that have arisen on claims to ring-fence expenditure supplement may also cause issues. Other anomalies may emerge as the rules are analysed further.

For UK based oil and gas groups with activities overseas it may be that the rules could be in point, but with the potential for countries to change their domestic rules in the style that the UK has suggested may mean that these rules, in most cases, become one of domestic law compliance and group reporting.

We shall provide further updates as more details are published.

CW Energy LLP

February 2022