* Industry pays little or no tax on 2 bln stg annualrevenues
* Tax change to cap intra-group deductions for rig leasing
* MPs criticise tax authority for leniency to business
* Tax authority accepts transfer pricing outcomes not alwaysfair
By Tom Bergin
LONDON, May 13 (Reuters) - A planned change in the wayBritain taxes North Sea drillers exposes the loophole in asystem that allowed an industry with annual revenues of 2billion pounds to pay almost no corporation tax for two decades,prompting accusations that the UK tax authority is falling downon the job.
The change, announced by Finance Minister George Osborne inMarch, caps the amount a UK company can deduct from profit forleasing drilling rigs from an overseas unit in the same group.
The rig-leasing units are typically based in countries wheretheir income is taxed lightly or not at all.
A Reuters review of company accounts, shipping registers andother company statements, shows that such inter-companytransactions - known as transfer pricing - have enabled drillinggroups in the North Sea to operate almost tax free for 20 yearsor more, perfectly legally, and with the agreement of Britain'stax authority, Her Majesty's Revenue & Customs (HMRC).
Companies that have benefited from the current rules includeEnsco Plc, Rowan Companies Plc and TransoceanLtd, which collectively accounted for over 60 percent ofthe UK market in 2012.
There is no suggestion of wrongdoing by any of thesecompanies, which declined to comment.
"HMRC has always been fully aware that companies use thisapproach," said Mike Tholen, Economics Director at North Seaindustry body, Oil and Gas UK. "The arrangements wereappropriate fiscally for the business these companies have."
John Sweetman a former tax inspector and now a taxconsultant, said it was unusual that an industry could continuefor so long with such a light tax burden.
"I suspect the industry was a step ahead. These companieswere very well advised .. (but) it is a long time. It's odd," hesaid.
The Treasury said the strong profitability of the sector waspart of the reason for acting now, though a broader governmentdrive to tackle tax avoidance was also a factor.
"Currently, some companies making significant operatingprofits in the UK are able to move up to 90 percent of theseprofits overseas and out of the UK tax net," a spokeswoman forthe UK Treasury said.
"In 2012, more than 1.75 billion pounds ($2.95 billion) waspaid by oil and gas operators in the UK to contractors who leasedrilling rigs and accommodation vessels. Almost no corporationtax was received on this," the finance ministry added.
GENEROUS DEDUCTIONS
Osborne's change, which will limit the amount companies candeduct from profit for such lease payments to 7.5 percent of thehistorical cost of the rig, will replace generous deductionscalculated on the market value of rigs, which has been soaring.
Andrew Cox, Tax partner at Deloitte, said HMRC had mostrecently agreed in 2008 that drillers could take tax deductionsof up to 20 percent of the market value of a rig each year.
Michael Meacher, MP with the opposition Labour party, whichgoverned from 1997 until 2010, said HMRC's failure to tackledrillers' profit-shifting earlier raised questions about itsoverall effectiveness.
"How much money are we losing elsewhere? I suspect that thisis quite widespread. What we really need is an investigation bythe National Audit Office to see how far this lax attitude totaxing companies applies across other sectors," he said, addingHMRC should receive more resources to crack down on profitshifting.
HMRC declined to comment on how it went about taxing thedrilling companies over the past 20 years, noting that the smallnumber of participants in the sector meant any comments it madecould identify individual companies and thus breach rules ontaxpayer confidentiality.
However, a spokesman said HMRC ensured all businesses paidthe tax they should.
HMRC acknowledged that the changes were partly in"recognition ... that transfer pricing and other internationalrules do not always provide a fair or consistent outcome".
A number of inquiries held by the parliamentary PublicAccounts Committee in recent years have criticised HMRC for notbeing aggressive enough with big businesses.
The amount of money the government expects the tax change toraise is equivalent to around 5 percent of total rig marketrevenues, which would have raised an additional $600 millionfrom Transocean, Ensco and Rowan alone over the last 10 years. ($1 = 0.5938 British Pounds) (Editing by Will Waterman)
