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Chapter OT43450

Document Cited authorities 1 Cited in Related
Vincent
Published date13 March 2016
Record NumberOT43450

This is the fifth of the methods referred to in OT43320. Paragraphs 3.5 - 3.25 of the OECD Guidelines outline the benefits and drawbacks associated with this method. It may be considered where transactions are very interrelated such that they cannot be evaluated on a separate basis.

The third party oil company is paying for both the supply and operation of a rig as one integrated transaction. The relationship between a rig owner and an operator can be a complicated one, and a wide spectrum of functions, risks and rewards may be embraced within it. It is important to carry out a full functional analysis to understand the relationship fully. What the Guidelines are trying to achieve is to replicate the dynamics of market forces in the dealings between the two associated entities.

HMRC’s view is that some sort of profit split is likely to be the most appropriate methodology to determine the profit arising to each party from the third party contract. Whilst the precise circumstances will vary from group to group an appropriate methodology would ideally involve a three step approach:

  • the basic function of the rig owner is to lease a capital asset, albeit a very valuable and specialised one. The usual starting point to calculate the reward of such an activity is by looking at the expected rate of return on capital originally invested;
  • the basic function of the rig operator is to provide services, albeit technical and specialised. In 2013 HMRC accepted...

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