Increased taxation of income from natural resources - Onshore wind power and hydro power production
On 28th September 2022 the Norwegian Government announced that the National Budget for 2023 will include proposals for resource rent taxation of onshore wind power and an increase of the resource rent tax rate for hydro power. In addition it was announced that an excise duty on electricity sold at high prices will be introduced on prices exceeding 0.70 NOK/kWh (NO “høyprisbidrag”).
Onshore wind power
The Government proposes to introduce a resource rent taxation on onshore wind power plants subject to concession (i.e. windfarms with more than 5 turbines or combined installed effect of 1 MW or more).
The resource rent taxation will be structured as a cash flow tax, similar to the hydro power taxation, whereas investments in wind farms can be directly deducted in the resource rent income. The proposed resource rent effective tax rate is 40% (formal tax rate of 51.3%), which will entail a marginal tax rate of 62% for large wind farms. The resource rent income is as a main rule calculated based on the spot price of the electricity produced. However, it is proposed to introduce an exemption for fixed price contracts entered into before 28th September 2022 whereas the contract price can be used as basis for calculating the resource rent income for the electricity comprised by the contracts in question. The same applies for contracts comprised by the new fixed price alternative for sale to consumers, as further described below.
Depreciations on already acquired assets will for resource rent tax follow the ordinary depreciation course, meaning that no additional deductions are granted to already acquired assets. Due to accelerated depreciation on investments in onshore wind farms (linearly over 5 years) acquired in the period FY15-FY21 we expect that the tax basis in a lot of already established windfarms is low to non-existent. This entails that for already established windfarms deductions will likely be minimal, due to very low tax basis for depreciation. As such, the cash flow taxation could substantially increase the tax burden for established wind farms as opposed to that for new wind farms, as new wind farms can benefit from full deductions on investments for resource rent tax purposes, and as such will likely be better positioned to handle the new tax provided the proposal is enacted as it now stands. There is no mention of a risk free return on investments in the proposal as per now. However, when resource rent on hydro power production was introduced granting of tax free return was crucial and included in the new tax system. In our view, it is not unlikely that this will also be a focal point when the proposal for resource rent on onshore wind power is subject to public inquiry.
The yearly increase in tax proceeds is estimated at NOK 2.5bn. The proceeds will be split equally between the state and municipalities.
The proposal will be submitted for public inquiry (NO “høring”) before year end and is proposed to enter into effect from 1th January 2023.
The Government also proposed an increase in the effective resource rent tax rate for hydro power from 37% to 45% (i.e. the formal resource rent tax rate is increased from 47.4% to 57.7%). This entails an increase in the marginal tax rate for hydro power from 59% to 67%, meaning that hydro power will continue to be the highest taxed industry in Norway together with the petroleum industry.
In addition, it is proposed that sale of origin guarantees shall be included in the resource rent income.
The yearly increase in tax proceeds is estimated at NOK 12.2bn.
Excise duty on electricity sold at high prices (NO “høyprisbidrag”)
Due to the extraordinary high electricity prices seen in the market this past year, it has been proposed to introduce an excise duty on electricity sold at prices exceeding NOK 0.7/kWh. The duty is 23% of the price exceeding this threshold. It is levied based on the actual prices received for the electricity, i.e. for fixed price contracts where the price is below the threshold no duty will be imposed. The duty will not be deductible for income tax purposes or in the resource rent tax.
For hydro power already subject to resource rent taxation it is proposed that the duty shall be effective from 28th september 2022. For windfarms and hydro power not subject to resource rent taxation (smaller hydro power plants, however not power plants smaller than 1 MW) it is proposed that the duty shall be effective from 1th January 2023. For hydro power plants subject to both resource rent taxation and fee on electricity sold at high prices the marginal tax rate can potentially become 90%. The marginal tax rate will be 85% for onshore wind farms subject to concession.
The taxable person for the excise duty shall be the owner of the power plant. The company owning the power plant will therefore most likely have to register for excise duties and submit monthly excise duty returns, starting from 1th January 2023.
The yearly increase in tax proceeds is estimated at NOK 16bn.
Fixed price contracts
It has also been proposed to introduce an exemption from the spot price valuation of electricity with regards to resource rent taxation to incentivise suppliers of electricity to enter into fixed price contracts. The proposal entails that under certain requirements the suppliers can enter into fixed price contracts with customers/consumers, and use the fixed price as basis for calculating the resource rent income rather than at spot. It is proposed that this should include contracts for periods of 3, 5 or 7 years, with a set markup.
To avoid improper use of the fixed price alternative, the electricity will need to be sold directly to consumers by the energy suppliers. An arm's length requirement will apply for sale between related parties (producers and consumers). In addition, the mark up that can be applied by the energy supplier will be regulated by law and limited to a percentage of the sales price (originally proposed to be NOK 0.05/kWh but the mark-up is under consideration and it is stated that it will not be limited to 0.05/kWh).
The decrease in tax proceeds is estimated at NOK 1.2bn per year for the income years 2023 and 2024, however the estimate is highly uncertain. Over time, the fixed price alternative is not assumed to affect income, since the fixed prices will be based on expected future prices.
The proposal will make it possible to avoid the 23% excise duty on electricity sold at high prices and limit the marginal tax rate to 67% and 62% for hydro power producers and wind farms respectively. However, since the fixed pricing will be based on expected future prices and the producers will aim to maximize their profit, we assume that the prices on the fixed contracts will be determined independent of the NOK 0.7/kWh threshold.
Linn Katrin Hansen
Jeg heter Linn Katrin Hansen og jobber som advokatfullmektig/manager i Advokatfirmaet PwC.
Jeg har en master i rettsvitenskap fra Universitetet i Bergen og en bachelor i økonomi og administrasjon fra Norges Handelshøyskole og har vært i Advokatfirmaet PwC siden 2018.
Til daglig jobber jeg med nasjonal og internasjonal bedriftsbeskatning, og bistår selskaper med oppkjøp, restruktureringer og løpende håndtering av skatt. Jeg har spesialkompetanse innen særkraftregimene for kraftprodusenter, og har også vært utleid til en av norges største kraftprodusenter som in-house tax analyst. Jeg er engasjert i teknologisk utvikling på skattefeltet, og er en aktiv bidragsyter til advokatfirmaets tax technology satsing.
My name is Linn Katrin Hansen and I work as an associate lawyer/manager in PwC law firm.
I have a masters degree in law from the University in Bergen and a bachelors degree in Economics and Business Administration from the Norwegian School of Economics, and have been with PwC since 2018.
My main areas of expertise include national and international corporate taxation, and I regularly assist companies with acquisitions, restructures, and other transactions. I have a special interest in the renewable energy sector, and particularly tax regimes for power plants. I also have a keen interest in tax technology and am an active participant in the firm’s tax technology department.
I’m always open for questions, comments or input, so please feel free to contact me.
Lars Hallvard Walby
Jeg heter Lars Walby og jobber som advokat i Advokatfirmaet PwC.
Jeg jobber med bedriftsbeskatning nasjonalt og internasjonalt, og har jobbet med skatt siden 1999.
I hovedsak bistår jeg norske og internasjonale industrielle aktører med løpende skatterådgivning, i forbindelse med reorganiseringer, grenseoverskridende transaksjoner og etableringer, samt oppkjøps- og salgsstrukturering, herunder tax due diligence. Jeg har spesialkompetanse på særskatteregimet for vannkraftprodusenter og generasjonsskifter i aksjeselskaper.
Det er mye som skjer på skatteområdet for tiden, ikke minst internasjonalt. Vi jobber hardt for å holde oss oppdatert og deler gjerne erfaringene. Ta gjerne kontakt dersom du har spørsmål, kommentarer eller innspill til innleggene.
My name is Lars Walby and I work as a lawyer in PwC law firm.
My main areas of expertise is national and international corporate taxation and reorganisations. I also have special expertise in the tax regime for hydropower production.
There is a lot going on at the tax area especially within the field of international taxation. We work hard to keep updated and we would like to share some of our experiences with you. Please feel free to contact me if you have any questions,comments or input to some of the articles.
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