Page last updated at 10:05 GMT, Friday, 5 June 2009 11:05 UK

Warning over 'Scottish oil tax'

Oil platform - generic
The report said Scotland's oil tax share could be worked out

Devolving control over oil and gas tax revenue to Scotland could have serious consequences for its budget, a new study has warned.

Industry expert Prof Alex Kemp said such a move would leave Scotland exposed to big funding changes, given the volatility of oil and gas returns.

Prof Kemp's study was carried out for the Calman Commission review of Scottish devolution, 10 years on.

But he also said Scotland's share of UK oil taxation could be worked out.

Prof Kemp, of Aberdeen University, said it would be possible to assign a share of oil and gas taxation revenue, based on activity within Scotland's territorial waters.

But he warned this scenario could result in cuts to the funding grant Scotland receives from the UK Government - and a higher reliance on constantly-changing oil and gas revenues.

The costs may be unduly high for a devolved government situation
Prof Alex Kemp's report

"The assignment of a Scottish share of these revenues would have major implications for the funding of the Scottish budget," Prof Kemp's report stated.

"It would expose the Scottish Parliament to significant revenue variations, given the inherent volatility of oil and gas taxation revenues."

His findings added: "Oil and gas taxation revenues from the United Kingdom Continental Shelf will also diminish over time, given the finite nature of the resource.

Prof Kemp, an expert in North Sea oil and gas exploration economics, also said devolving tax policies would create the complicated situation of separate taxation regimes in Scottish and the rest of the UK's waters.

"While these would be justified for an independent Scotland, the costs may be unduly high for a devolved government situation," he said.

"Only if there is a substantial difference in taxation policies between the two governments would this be appropriate."

Finance Secretary John Swinney responded: "Today the dam has been breached on oil revenues and borrowing.

"The UK government's years of saying 'no' is clearly no longer credible. Things are moving in Scotland's direction.

"We welcome the long overdue recognition - after more than 30 years in which around £270 billion in North Sea revenues have flowed to the Treasury - that Scotland is entitled to a fair share of its own oil revenues.

"The recognition of the benefits of a Scottish oil fund, similar to the Norwegian fund which is now worth more than £200 billion, is also significant. Such a fund has been suggested for years.

"However, giving Scotland responsibility for our own oil resources only makes sense if the country now moves on to raise all the money it spends, with full fiscal autonomy.

Tax powers

Prof Kemp said borrowing and investment powers for Scotland could offset oil and gas revenue variations to be mitigated, such as large investment in an oil fund - which the Scottish Government has called for - when prices where high.

He also suggested an alternative, where the UK Government could retain responsibility for taxation, but share revenues with Scottish ministers.

A separate report published by the Calman Commission also said there would be a case for borrowing powers for Scotland, if greater taxation powers were also devolved.

But it concluded that it would not be appropriate for Scottish ministers to borrow if Scotland continued to be funded by the UK Government block grant.

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