Tax Spinning in the Brent Spot Market

Published date01 February 1995
Date01 February 1995
AuthorEmmanuel Tem
Subject MatterAccounting & finance
Journal of Financial Crime Vol. 3 No. 1 Tax
Tax Spinning in the Brent Spot Market
Emmanuel Tern
With the growing insecurity in term contracts,
especially during the 1979 oil crisis, many oil com-
panies increasingly turned to the spot market, not
for balancing their crude requirements at the mar-
gin but as a mainstream source of supply. Spot
markets have a number of sources; they are fed by
the balancing availabilities and requirements of
producers and refiners. During periods of
depressed prices, they receive a boost from large
exporters in search of higher prices. North Sea oil
production has been vital to the growth of the
market. Being a non-OPEC source and close to
markets, production from this source has been
close to maximum rates in order to service high
fixed investment costs.
The Brent blend which is the principal
North Sea crude traded in the spot market is a
'marker crude' and traded internationally. The
standard 15-day Brent contract involves sales or
purchases of
cargo for delivery on an unspecified
future date of a given month. Brent contracts are
essentially 'futures' contracts with the parties to the
transaction having the option either to 'book out'
or to enter into offsetting arrangements with third
parties. These contracts can be sold without phys-
ical cover initially and a party may enter into a
Brent contract without an intent to take physical
delivery on that contract. Participants may take
long or short positions in the market for purposes
of hedging and speculation. However, a limited
number of Brent oil sales may start out 'dry' but
ultimately become 'wet', subject to liquidation of
the contract. About 90 per cent of the trades in the
Brent market are for speculative or hedging
purposes and are undertaken mainly to assume or
shift price risks. It is a highly liquid market and its
development has been greatly facilitated by innova-
tive trading instruments and risk management
The spot market provides an excellent case study
for an analysis of commodity trading risks and the
development of contractual instruments and mar-
ket structures to manage these risks. The
'commodisation' of oil is the result of both risk
management needs and the significant changes in
the elements of the business environment, levels of
government intervention, technology, globalisation
of the markets, sophistication of the players and
available techniques and market information.
The Brent market provides an alternative to the
pricing of crude oil and it is an important source
of 'price signal' for crudes in the world market.
However, the market also plays an important role
in the 'tax avoidance' industry. Tax spinning trans-
actions constitute a significant feature of the
market ascribed to UK transactions which is its
natural habitat. The benefits from spinning are
enormous and arise from the 'loopholes' in the
pricing rules of the principal UK oil taxation legis-
lation. Although spinning transactions may be
regarded as permissible tax avoidance (ie not
illegal), the large volume of tax-motivated spinning
and the collusion of the oil companies in the mar-
ketplace raise important legal and policy issues.
The principal legal problems in this area relate to
the handling of the avoidance-evasion conun-
drums in characterising transactions for purposes
of liability and the prevention of spinning through
the tax system, ie the Oil Taxation Act. The policy
question concerns the regulation of trading in the
market in order to control collusive and manip-
ulative behaviour and other anti-competitive
Tax spinning is made possible because the UK
'pricing rules'1 charge arm's-length sales2 on actual
prices received and non-arm's-length supplies or
appropriations to refining on an average monthly
market value. This general principle, when applied
in an arena in which the same cargo of oil may be
sold many times in advance of the delivery month,
will allow companies the opportunity to choose
with the use of hindsight the particular transac-
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