Spc00679

EMPLOYMENT – Seafarers – Foreign earnings deduction – Workover/support vessel for oil industry – Ship – Whether offshore installation within Offshore Installation and Pipeline Works (Management and Administration) Regs 1995 and ICTA 1988 s.837C(1) – Whether stationed when dynamically positioned – ICTA 1988 s.192A – ITEPA 2003 s.384 and 385 – Appeals dismissed
THE SPECIAL COMMISSIONERS

KEITH WYN TORR	Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

CAPT WILLIAM J G MAIR	Appellant

-	and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents
JAMES INNES	                                     Appellant
- and –
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

CAPT DAVID B HARGRAVE	                         Appellant
- and –

THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

JOHN PAUL BUCHANAN                                 Appellant
- and –
THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Special Commissioner:  THEODORE WALLACE
Sitting in public in London on 17 and 18 December 2007
Capt. Mair did not attend and was not represented.
G F Robertson, of Diss Accounting and Taxation Services (European) Ltd, for Mr Torr, Mr Innes, Capt Hargrave and Mr Buchanan; Colin Williams, Inspector of Taxes, for the Respondents
© CROWN COPYRIGHT 2008

DECISION

1.	These five appeals concerned the entitlement of the Appellants to the foreign earnings deduction for seafarers in years when they were employed aboard the vessel “Pride South America” formerly called “Amethyst 1” carrying out well workover operations in the Campos Basin, within Brazilian territorial waters.  I refer to the vessel as Pride South America.

2.	The appeals of Mr Torr, Capt Mair and Capt Hargrave related to 2002/03 when the relevant legislation was section 192A of the Income and Corporation Taxes Act 1988 (“ICTA 1988”) and regulation 3 of the Offshore Installation and Pipeline Works (Management and Administration) Regulations 1995, which I refer to as “the 1995 Regulations”.

3.	The other two appeals related to 2003/04 and 2004/05 when the relevant legislation was contained in sections 384 and 385 of the Income Tax (Earnings and Pensions) Act 2003 (“ITEPA 2003”) coupled with regulation 3 of the 1995 Regulations for 2003/04 and section 837C(1) of ICTA 1988 for 2004/05.

4.	It was accepted by the Revenue that, apart from the exclusion of offshore installations by ICTA 1988, s.192A(3) and ITEPA 2003, s.385(a), the Pride South America was a ship.

5.	The issue under the 1995 Regulations was whether the Pride South America was a structure used while standing or stationed in relevant waters for the exploitation of mineral resources.  I return later to the actual wording of regulation 3(1)(a).  The wording of section 837C is similar but not identical.

6.	Captain Hargrave gave evidence and was cross-examined.  The documentary evidence included certificates by Lloyd’s Register of Shipping, print-outs from the data.rigzone.COM website and the website of Pride International plc the owner of Pride South America, an extract from a work history or log of services performed by Pride South America during the years in question and a condition survey report dated September 1998.

7.	The following facts were agreed.

8.	Throughout the year 2002/03 Mr Torr was employed by Jaymar Shipping Services Ltd, working as a chief electrician aboard the Pride South America in seven periods falling wholly or partly within that year.

9.	Throughout the same year Capt Mair was employed by Pride International Ltd, working as an ISM co-ordinator and Master aboard the Pride South America in seven periods falling wholly or partly within that year.

10.	In the year 2002/03 Mr Innes was employed by Pride International Ltd, working as a Master/D.P.O aboard the Pride South America.  In the year 2003/04 he was employed in the same capacity aboard the same vessel by Petroleum International PTE Ltd in thirteen periods falling wholly or partly within those years.

11.	Throughout the year 2003/04 Capt Hargrave was employed by Petroleum International PTE Ltd, working as a Chief Mate aboard the same vessel in seven periods falling wholly or partly within that year.

12.	Throughout the years 2003/04 and 2004/05 Mr Buchanan was employed by Petroleum International PTE Ltd, working as a senior D.P.O., Second Officer and Second Mate aboard the same vessel in fourteen periods falling wholly or partly within those years.

13.	The Pride South America is a self-propelled, dynamically positioned, semi-submersible vessel, originally designed as an offshore drilling unit but in the periods in question operated as a workover/support vessel carrying out well workover operations in the Campos Basin.

14.	It was agreed that all Appellants had qualifying periods for the purposes of section 192A.  It was also agreed that the Pride South America was an excepted structure (and therefore not an offshore installation) in the period 21 April 2002 to 28 June 2002 whilst undergoing repairs.

15.	I find the following additional facts.  The vessel was built in Holland in 1987.  It was acquired by Pride International in 1988 for whom a condition survey report was prepared.  The report stated that the vessel was suitable for workover and support operations in accordance with her original design concept for pipeline and other sub-sea installations; it stated that in her present condition the vessel could not be used for drilling.

16.	A certificate issued by Lloyd’s Register of Shipping on 24 February 1999 gave the gross tonnage as 12,314.  The certificate gave the class as workover/support vessel.  The definition in Lloyd’s regulations of “workover” was that the vessel could install, refurbish and perform sub-sea completion work on wells but could not enter the pressure confines of the well due to the limitations of its equipment.  The designation “support vessel” indicated that the vessel had functions other than workover, i.e. diving, crane operations, including heavy lifts, construction and pipe laying.

17.	The Pride South America has never undertaken any drilling operation since its arrival in the Campos Basin on contract from Pride International to Petrobras.  It was employed solely on field construction, including platform refurbishment and installation of sub-sea manifolds, sub-sea X-mas tree installation and recovery and workover duties such as cleaning seabed flow lines and X-mas trees of hydrates and similar substances.  At the relevant time it was not fitted with a blow out preventor (or BOP) and could therefore only be engaged on operations not involving a high level of risk.  It did not recover or store hydrocarbons and was not engaged in oil field exploration.

18.	In 1998 the diving equipment was removed, the central lifting derrick was increased in height and the after deck was strengthened to allow umbilical laying operations.

19.	On top of any oil well under the sea is a structure known as an X-mas tree extending about 10 metres up from the sea bed.  The oil flows up through the X-mas tree which has a set of valves through which the oil flows via a pipeline to the oil platform which may be up to five miles away.  Manifolds are junction boxes for a number of pipelines to be connected for a single onward flow.  The oil flows up under its own pressure unless it is an older well when sea water is injected to produce the necessary pressure.  The Campos Basin is an old field. 

20.	Pride South America used remotely operated vehicles with cameras controlled by operators on the vessel who could adjust the valves on the X-mas tree using the remotely controlled vehicles.

21.	The Pride South America could not be used when the oil was flowing because it was not appropriately equipped. When there was a problem requiring its attendance, the well was “killed”, by which is meant that the flow was halted temporarily, with all valves being closed when Pride South America was summoned.

22.	Although a blow out preventor was fitted in 1998 it was not used and was put into wet storage in 2000.  It was recovered from wet storage in 2002 but had become choked with sand and was never used.

23.	When necessary an X-mas tree was removed and brought up to the surface for repair on board Pride South America or to be changed for another X-mas tree.

24.	Pride South America also carried out work similar to rodding through a drain, stirring up sand and dirt in pipelines using a coiled tubing unit after which diesel oil was pumped through the pipeline to the platform where it was burned off.

25.	Other work performed included the construction of manifolds under the sea to connect pipelines, the replacement of pressure vessels on platforms and the construction of accommodation on platforms for workers.

26.	When necessary Pride South America carried out work down a well when it had been killed, pumping a heavy liquid into the well.  On occasion measuring devices were placed on an X-mas tree to measure the temperature or pressure. Pride South America did not work on abandoned wells.

27.	The Campos Basin is one of the largest deep water oilfields in the world.  The log shows work on a manifold at a depth of 1890 metres.  The Campos Basin is over 100 miles out into the Atlantic from Rio de Janeiro and has hundreds of wells.  Pride South America went from field to field as required.  The work history showed 18 movements in 2002-03, including four jobs involving X-mas trees, two involving manifolds, five involving pipelines and three involving platforms.  Apart from a journey to Rio to pick up a manifold, the longest job was 28 days recorded as “Break Hydrate & flush Flow lines to platform”.

28.	The work history showed 24 movements in 2003-04 involving nine X-mas trees and 26 movements in 2004-05 involving fourteen X-mas trees.

29.	Frequently Pride South America was required to leave work in progress in a safe or protected condition and to move to a higher priority problem, perhaps two days away travelling at up to 7 knots.  Some X-mas trees or wells operated without a problem for many years.

30.	When working on an X-mas tree Pride South America was connected to the tree by a pipe and maintained its position directly above the tree by dynamic positioning.  The connecting pipe was flexible.  Wire-lining to obtain readings from a well required dynamic positioning.

31.	Although mainly engaged in repairing non-functioning equipment, Pride South America was not engaged in a regular maintenance programme, being used rather when problems arose.  Its time is charged out at around $120,000 dollars a day; Pride International charges almost twice as much for its drilling rigs.

Submissions

32.	Mr Robertson said that the Pride South America was not used while standing or stationed in relevant waters.  He referred to paragraph 18 of the Guidance Notes by the Health and Safety Executive for the 1995 Regulations.  He said that “stationed” meant wholly static or anchored; a degree of permanence was needed.

33.	He said that Pride South America was not engaged in the exploitation of minerals resources.  It neither made use of the oil nor benefited from the exploitation.  Pride International was merely a contractor.  The ship was purely a service vessel.  It was only involved in low risk work which was carried out when the well was killed.  When a well was killed it was not being exploited but rather was being repaired.

34.	He said that the argument advanced by the Revenue would mean that anyone working on a ship involved in the oil industry would be stripped of foreign earnings deduction, including surveyors working on survey vessels.  He said that the Revenue’s case conflicted with the Revenue Manual at EIM 33104 which listed well service vessels among ships which may be accepted as ships; all the other vessels listed there would be excluded as offshore installations.

35.	For the Revenue, Mr Williams said that there were two key questions: whether Pride South America was used for the purposes of mineral exploitation by means of a well and, if so, whether it did so while stationed.

36.	He said that the word “exploitation” was not statutorily defined and should be given its normal meaning.  The New Oxford English Dictionary (2nd ed.) gave “The action of making use of and benefiting from resources.”  There was no significance in the addition of the words “the purposes of” after “for” in section 837C or their absence in the 1995 Regulations.  He said that exploitation involves several stages in extracting crude oil from a well.  The well has to be drilled; its infrastructure has to be completed with X-mas tree, pipes and manifolds; then follows the production stage when the oil is extracted; finally when exhausted the well has to be closed down and made safe.  All are envisaged at the outset.  Maintenance and repairs are necessary to keep the field operating so as to exploit the mineral resources.  He said that it was too simplistic to say that Pride South America was just repairing: the repairs were essential to the exploitation.  The process of exploitation was a long-term process.  Although an individual well or X-mas tree may not require attention for many years, over a field of any size some trees would need attention in any year.

37.	Mr Williams accepted that there is a border-line beyond which a ship is not used for exploitation, but said that Pride South America was not beyond that line.  He said that the words “by means of a well” appeared to add nothing, merely reflecting the fact that oil is extracted via a well whereas some other minerals might be dredged.  He said that the activities of Pride South America were an integral part of the exploitation. He said that if necessary he would have submitted that the reconstruction of staff accommodation on a platform was encompassed in the term “exploitation”.

38.	He said that in order to be stationed a vessel does not have to be totally static: here Pride South America was kept in position by dynamic positioning when work was being carried out.  He said that when in transit to a site although not then stationed it was “to be used”.

39.	He said that the manual was not relevant to the interpretation of the statutes but the distinction in EIM 33014 might be that the ships listed might not be standing or stationed. He said that the HSE guidance to the 1995 Regulations was only guidance. He pointed to paragraph 22 where in effect it said that intervention of three days or more was permanent enough for a ship to be stationed.

Conclusions

40.	The appeals concerning 2002/03 and 2003/04 turn mainly on the interpretation of regulation 3 of the 1995 Regulations which were not made for any purpose related to tax, being concerned with the safety, health and welfare of persons on offshore installations or engaged in related pipe-line work in British controlled waters. The regulations were in fact made under the Health and Safety at Work etc Act 1974 which provided for replacement of the Mineral Workings (Offshore Installations) Act 1971 by regulations. The 1995 Regulations substituted definitions of “controlled waters” and “offshore installation” in section 12 of the 1971 Act “unless the context otherwise requires”, providing that “ ‘offshore installation’ has the same meaning as in regulation 3 of the 1995 Regulations.”

41.	Section 192A of ICTA, which was inserted by the Finance Act 1998, which gave the foreign earnings deduction for seafarers provided under subsection (2) that employment as a seafarer means an employment consisting of the performance of duties on a ship.  Subsection (3) provided,

“For the purposes of this section a ‘ship’ does not include – 

(a)	any offshore installation within the meaning of the Mineral Workings (Offshore Installations) Act 1971, or 
(b)	what would be such an installation if the references in that Act to controlled waters were to any waters.”

Regulation 3 of the 1995 Regulations provides so far as relevant,

“(1)	… the expression ‘offshore installation’ means a structure which is, or is to be, or has been used, while standing or stationed in relevant waters … -

(a)	for the exploitation, or exploration with a view to exploitation, of mineral resources by means of a well;
(b)	for the storage of gas in or under the shore or bed of relevant waters or the recovery of gas so stored;
(c)	for the conveyance of things by means of a pipe; or
(d)	mainly for the provision of accommodation for persons who work on or from a structure falling within any of the provisions of this paragraph;

and which is not an excepted structure.

(2)	For the purposes of paragraph (1) the excepted structures are – 

…
(b)	a well;
…
(e)	a mobile structure which has been taken out of use and is not for the time being intended to be used for any of the purposes specified in paragraph (1); and
(f)	any part of a pipeline.

(3)	For the purposes of these Regulations there shall be deemed to be part of an offshore installation – 

(a)	any well for the time being connected to it by pipe or cable;
(b)	such part of any pipeline connected to it as is within 500 metres of any part of its main structure;
(c)	any apparatus or works which are situated –

(i)	on or affixed to its main structure; or 
(ii)	wholly or partly within 500 metres of any part of its main structure and associated with a pipe or system of pipes connected to any part of that installation.

(4)	Where two or more structures are, or are to be, connected permanently above the sea at high tide they shall for the purposes of these Regulations be deemed to comprise a single offshore installation.

42.	Neither side cited any cases on the interpretation of regulation 3 and none are cited in paragraph 916 of volume 20(2) of Halsbury Laws (4th ed, re-issue).

43.	In my judgment in the context of regulation 3 “exploitation” clearly refers to physical rather than economic exploitation, particularly since the exploitation is “by means of a well”.  It does not cover sale of mineral rights for a capital sum or royalties.  It clearly involves extraction of the crude oil from under the sea bed.  Furthermore it involves use of a structure.

44.	The real question is how far the concept of use of a structure for exploitation of mineral resources by means of a well extends.

45.	In the context of the 1995 Regulations it involves a structure on or from which persons are working or near which persons are working, the enabling provisions being concerned with health and safety at work.  It is clear from regulation 3(2)(e) that the structure may be mobile.

46.	Regulation 3(1)(a) distinguishes “exploration with a view to exploitation” from “exploitation” and suggests that pure exploration would not otherwise be covered.

47.	The paradigm example of a structure within regulation 3(1)(a) is a platform.  The platforms in the Campos Basin had over 100 persons working on them.  Those working on the platform were concerned to ensure continuity of production from the wells.  Long periods of time occurred with no problem.  However when there was a problem the well sometimes had to be killed temporarily to enable Pride South America to attend and take remedial action.

48.	In my judgment the mineral resources do not cease to be exploited merely because a well is killed to enable corrective action to be taken.  While I do not accept the submission of Mr Williams that exploitation encompasses work after the oilfield has ceased production, I hold that it does cover repair work when the field is in production notwithstanding the fact that the field has to be temporarily killed.

49.	I see no logic in the 1995 Regulations, which are directed to health and safety, applying if the structure is only in use during normal production when there is no problem but not applying if the structure is used to remedy a problem.  In my judgment the Pride South America was used for the exploitation of mineral resources, notwithstanding that the wells were killed or shut down while it was being used.

50.	I have no hesitation in deciding that the use was while standing or stationed.  The New Shorter Oxford English Dictionary gives the following meaning for “station”: “1.Assign a post, position or station to (a person, troops, ships, etc); place, post.  2. To take up one’s station, post oneself.”  It would be absurd to suggest that a ship can only be stationed if it is either secured by anchors or hawsers.  A ship can clearly be stationed in deep water.  While the context in which the word “stationed” is used is as alternative to “standing”, the word clearly envisages the ship being substantially stationery, I am satisfied that when dynamically positioned the Pride South America was stationed.

51.	For 2003-04 section 192A(2) and (3) of ICTA 1988 were replaced by sections 384 and 385 of ITEPA 2003.  In my judgment there was no change in the law as it applies to the circumstances under appeal.

52.	For 2004-05 section 837C(1) of ICTA 1988 replaced the reference to regulation 3 of the 1995 Regulations.  In my judgment no substantive change was effected as regards the circumstances of Mr Buchanan.

53.	While the logic of applying health and safety legislation to persons employed on offshore structures in British waters or the Continental Shelf is clear, the logic of denying foreign earnings deduction to seafarers working on offshore structures in the South Atlantic is not apparent.  However while I have considerable sympathy with the Appellants, my duty is to interpret the law as enacted.  The appeals are dismissed.

THEODORE WALLACE
SPECIAL COMMISSIONER

RELEASED: 14 January 2008

SC 3181/2006
SC 3192/2006
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