§ I come now to two further important changes concerning business taxation.
§ Under the law as it stands at present the United Kingdom sector of the Continental Shelf is outside this country for the purposes of taxation. The result is that profits from exploration and exploitation of the resources of the Shelf are normally liable to United Kingdom tax only if they are earned by an enterprise which is resident in the United Kingdom. This follows because a resident 263 enterprise is liable to tax on all its income from any source throughout the world. But under the present law profits which a non-resident enterprise makes from such operations on the Continental Shelf are not liable to tax here unless made through a branch in this country.
§ This situation is no longer justifiable. All profits from exploration and exploitation of the United Kingdom sector of the Continental Shelf will therefore be brought within the charge to United Kingdom tax. At the same time employments on the Shelf which in many cases have been outside the scope of United Kingdom income tax, will become chargeable to tax under the normal rules.
§ The Public Accounts Committee last week drew attention to the probability that the yield of tax to the British Exchequer from the North Sea profits may in the case of many of the companies be seriously impaired by the setoff of artificial losses made by those companies from their trade in oil from other parts of the world, and it recommended that the Government should take action substantially to improve the effective tax yield from operations on the Continental Shelf.
§ I am sure that the Committee was right, and I accept this recommendation. The House will wish to know how these artificial losses arise. The companies producing oil in the Middle East and elsewhere sell the crude oil at what are called "posted prices". These prices are largely dictated by the governments where the oil is produced. But these "posted prices" are considerably higher than normal commercial prices and the broad effect of these arrangements, therefore, is to produce an artificially inflated profit in the producing country which the government of that country can tax, and a corresponding artificial loss in this country which under the existing law is available for relief against other profits.
§ Up till now this has been a theoretical rather than a practical problem as there have been little or no other profits against which the losses could be set. But the situation will be quite different with the profits from North Sea oil. If we are to safeguard our position we must take action. The magnitude of this problem can be judged from the fact that the losses which have already accumulated amount to £1,500 million. This means 264 that, unless we make a change, the first £1,500 million of profits from North Sea oil would effectively be exempted from corporation tax. And this in its turn might well mean that, as the PAC observed, we should get little tax revenue from North Sea oil production even by 1980.
§ To implement the recommendation of the PAC it is therefore necessary to deal both with the new losses and with those which have already accumulated. The PAC Report makes special mention of two techniques for this purpose. First, for dealing with current losses which arise from the use of artificial prices it would be possible to prescribe an alternative administered price for United Kingdom tax purposes. Second, the accumulated losses could be segregated so that they were set only against future profits from the existing business and not against profits from the Continental Shelf.
§ I agree with this approach and propose to follow it. In the normal way I would have legislated in this year's Finance Bill. But the issues involved are complex and it is therefore in the general interest to have full consultations with the industry first to ensure that the legislation takes full account of the practical problems involved.
§ Profits from North Sea oil will probably not arise until 1975 so that deferment of the legislation should not create difficulties. But in any event I wish to make it clear that the Exchequer must not suffer as a result of any delay caused by the need to consult. The legislation will therefore provide that the new arrangement to prevent current losses will apply to the current trading year of the companies; the arrangements for accumulated losses will apply to any losses which had arisen for tax purposes up to the end of the companies' last accounting period.
§ The PAC also pointed out that under the present arrangements the Exchequer's share of the "take" from oil operations on the Continental Shelf is substantially less than is obtained in other countries. As I have already said, profits from North Sea oil will probably not arise until 1975, but I can assure the House that the Government already had under consideration the other important questions affecting licensing terms and the Government's 265 "take" from operations on the United Kingdom Continental Shelf to which the PAC has drawn attention.