In his 2002 budget speech, the UK Chancellor of the Exchequer announced changes including a supplementary charge of 10% from April 17, 2002 on profits from UK North Sea oil and gas production in addition to the current 30% corporation tax. The supplementary charge excludes any deduction for financing costs. At the same time, in order to promote investment, the Chancellor increased first year capital allowances for expenditures on plant and machinery from 25% to 100%.
In addition, the UK Government stated that it "intends, subject to consultation on the appropriate timing, to abolish royalties". The royalty rate on older fields is currently 12.5%.
Based on current capital expenditure forecasts, Talisman expects the short term impact of the new 10% supplementary tax on North Sea oil and gas profits will be more than offset by the increased capital allowance. The Company expects that the effect on its cash flow will be positive through the end of 2004. On a non cash basis, the provision for the future tax liability will be increased once the legislation is enacted. This will result in a charge against income in the second quarter.
The long term impact is more uncertain as it is dependent on future investment decisions and the prevailing price environment, however, Talisman believes the impact of higher taxes on the Company could be offset if royalties are abolished as indicated. Talisman will continue to seek further measures to promote the economic recovery of reserves in the UKCS.
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