What horrors, oil companies only pay profits tax on their profits

The National Audit Office has released a report which is bound to cause a certain amount of wailing. For it states that oil companies operating in the North Sea only pay profits tax upon their profits.

British taxpayers face a £24bn bill for tax relief awarded to oil and gas companies removing hundreds of North Sea wells, rigs and pipelines, the UK public spending watchdog has said.

The National Audit Office (NAO) said the figure would climb if companies collapse and are unable to pay for cleaning up their operations, leaving the government to pick up the tab.

As you can see that’s not quite exactly how The Guardian is reading this. The report is here.

What is actually being said is as follows. Those rigs out there in the ocean, they’re long lasting but not eternal assets. At the end of their life they need to be cleared up. That clearing up cost is part and parcel of the entire cost of the building operating and, yes, removal.

It’s also true that, at least as best we can, we tax the profits of an activity over the whole cycle of that activity. For, clearly enough, it’s only over the entire lifespan that we can actually work out what is the profit from having done it. The first few years of anything are a pouring in of money and thus losses, we carry those forward to offset against profits when they are indeed made. These oil platforms being a little different in that there’s this bolus of costs at the end as well. But, obviously enough, the profit from having exploited the field needs to include the costs of getting rid of the rig just as it already does the building and placing of it.

Yet the need to stuff the government’s maw with revenue means that that’s not quite how we’ve taxed these companies over the decades. We’ve looked at the costs and revenues per year, not over that entire lifecycle. Now those end of life costs are coming due and sure, companies can count them as costs and deduct them in the calculation of what profits they’re making which can be then taxed.

That’s all these “tax credits” are. Just another cost which is deducted from revenue before profits, thus profits tax, are calculated. Further, we can’t actually have a tax system that works any other way. Well, not a fair nor efficient one at least.

There will, of course, be cries to the Heavens about these subsidies to the capitalists who’ve been raping Gaia and all that. Yet all that is happening is that costs are being deducted from revenues before profits are calculated to be taxed. Given that this is how we work out what are profits that are then taxed why the complaining?