Tax, VAT and accounting implications of Norwegian Public-Private Partnerships (OPS)

In recent years, the Public-Private Partnership-model (“Offentlig privat samarbeid”, OPS) has been frequently used for the construction of Norwegian hospitals, schools and roads. For enterprises seeking to participate in Norwegian PPP-tenders, the model raises distinctive issues under Norwegian tax, VAT and accounting law which bidders must have an awareness of. 

What are Public-Private Partnerships?

Traditionally, Norwegian roads and highways have been constructed with the Norwegian road authorities acting as the accountable owner of the construction projects, having the full responsibility for the planning, construction and operation of the roads and highways. The authorities will then seek assistance from private contractors to the extent deemed necessary along the way.

The PPP-model, on the other hand, entails that a private enterprise is hired to act as the state’s representative and assumes the full responsibility for the construction project for a 20-30 year period. This period will generally span both the planning and construction of the infrastructure, as well as its operation and maintenance for the duration of the agreement period.

The PPP-model has generally been seen to provide a profitable alternative to the traditional model, as it i.a. facilitates financing and encourages an accelerated completion of infrastructure projects. Although the traditional model is still employed, the PPP-model has thus been frequently used for highways and larger infrastructure projects with relatively visible risks and relatively few interested parties, e.g. roads which do not pass through larger urban areas.

Taxation of PPP projects – income recognition, financing and cash repatriation

Income recognition

Under Norwegian tax law, the main rule for income and cost recognition is the realisation principle. Under mutual contracts, the realisation principle broadly entails that a benefit is recognised as income at the time the performance debtor has fulfilled his obligations under the contract.

The peculiarity of PPP contracts, however, is that the contracts generally make the payment of the construction fees dependent on the subsequent operation of the facilities. For PPP contracts, the realisation principle would therefore entail that the PPP companies would be taxed on the profits derived from the construction of the facilities before these are received. As the PPP companies' would incur increased financing costs related to the payment of such taxes, and as such fees would have to be included in the construction fee, the application of the realisation principle would be costly for the Government.

In tax practice, an alternative solution has thus been allowed for PPP contracts. In broad terms, this approach allows the income recognition of the construction fees to take place in line with the payment schedules set out in the contract, without distinguishing between construction fees and operating fees. Whether this treatment is applicable must, however, be analyzed on the basis of the specificities of the individual PPP project. For clarity, a binding advance ruling may also be obtained.

Financing structure and cash repatriation

PPP projects further engage a number of planning considerations in relation to company structure, financing and cash repatriation. Generally, PPP projects require significant loan capital. Considerable thought must therefore be put into understanding the implications of Norwegian thin cap rules, interest stripping rules and interest withholding tax rules for the establishment of the Norwegian group’s financing and company structure.

In addition, the foreign structure holding the investment into Norway must be closely considered in order to ensure flexible cash repatriation.

Typical VAT implications in PPP Projects

The supply of construction services in Norway is generally subject to 25 % Norwegian VAT. When a foreign enterprise participates in PPP projects in Norway, it will therefore need to consider how to handle the Norwegian VAT rules, both in relation to its procurements and contractual supplies in connection with the project. In particular, PPP projects typically involve VAT related measures that should be taken to avoid cash-flow inefficiencies.

The Norwegian legislation concerning the accrual of the output VAT in PPP projects has been a much debated topic, and the applicable bookkeeping regulations within this area have recently been amended. We have also observed that the government agencies may require that the contractor takes on the liability to ensure correct treatment of the VAT when participating in a PPP tender.

VAT registration for PPP participants 

Both foreign contractors and subcontractors that participate in PPP projects in Norway are normally obliged to register for VAT. The obligation- and right to register for- and charge VAT is triggered once the VAT liable turnover in Norway exceeds the registration threshold of NOK 50,000 (net value).

The registration threshold of NOK 50,000 implies that a foreign established contractor involved in a Norwegian PPP project, is not in a position to register ordinary for VAT until the registration threshold is exceeded. This could potentially entail a material negative cash-flow impact for the contractor.

In this type of projects the foreign contractor often incur material amounts of input VAT related to purchases from its subcontractors (and other players), before exceeding the VAT registration threshold for its own supplies (under the contract with a government agency). Typically, the contractor may receive invoices from its subcontractors with Norwegian VAT on an ongoing basis, for an extensive period of time before it starts to earn a revenue. As a starting point, this implies that the contractor is not in a position to deduct the input VAT incurred for a significant period of time, which entails a material negative cash-flow impact.

One practical approach to avoid this cash-flow inefficiency is to apply for a pre-registration for VAT. However, the option to pre-register for VAT is subject to specific legal requirements, and the company must be able to substantiate towards the tax authorities that the conditions for a pre-registration are actually met. It is therefore highly recommended to assess in advance whether pre-registration is a viable option (preferably before participating in the tender). Further, it is important for the contractor to ensure that the pre-registration application is well prepared, in the sense that it includes the relevant facts, documentation and arguments to substantiate that the legal conditions are met.

Accrual of output VAT in construction contracts

A crucial element in PPP projects is to determine whether the contractual provisions entered into between the parties (in particular the payment schedule), are aligned with the VAT accrual rules for this type of projects. Since we have experienced that this is not always the case, the contractual provisions which affect the VAT treatment could be an important part of the negotiations already during the bidding process. 

As a starting point, construction contracts could be considered as supplies of services that are delivered on a continuous basis. By virtue of the Norwegian Bookkeeping Regulation, continuous supplies of services must be invoiced no later than one month after the end of the VAT period when the services were delivered. This could potentially entail that the contractual supplier is actually obliged to report and pay the output VAT on its contractual deliverables on a continuous basis, regardless of whether it is contractually entitled to receive payment from the acquirer at this stage. If the PPP provider is not contractually entitled to payment of the VAT that must be paid to the tax authorities, this would naturally result in a negative cash-flow impact.

However, the Norwegian Bookkeeping rules contain a specific provision for construction projects, which allows the supplier to issue invoices (including VAT) in accordance with the “actual progress” of the work. Hence, when the parties have agreed a payment plan which is aligned with the “actual progress” of the work (e.g. milestone payments which do not significantly deviate from the actual work progress), the VAT should in principle be invoiced and reported to the tax authorities in accordance with the payment plan.

Further, amendments of the Bookkeeping Regulations adopted in January 2021 now provide more flexibility for the contractor to postpone the invoicing until completion of the work (more specifically until 1 month after the expiration of the VAT period when the work was completed). This amendment of the regulation is in particular beneficial for contractors who do not receive payments from the acquirer in accordance with the payment plan (e.g. because the payment is disputed by the acquirer). 

However, according to the new regulation the invoicing (and reporting of the output VAT) cannot be postponed beyond the time of completion of the work. In some cases it could also be necessary to further assess when the relevant work is actually deemed completed. E.g. when the construction contract involves several sub-projects, the contractor could, depending on the circumstances, be required to invoice- and report output VAT upon completion of this individual part of the contract.

It is also important to note that the current regulation requires the contractor to invoice- and report output VAT for any partial payments it actually receives in line with the work progress during the construction works. To safeguard its VAT treatment in a PPP project, it is therefore important for the contractor to ensure that both; 1) the special bookkeeping rules for construction projects are actually applicable, and 2) it is entitled to receive payment of the VAT from the acquirer (e.g. government agency) when the VAT is due to be reported and paid to the tax authorities.

Treatment of import VAT 

As a general rule, all imports of goods into Norway are subject to import VAT. In cases where the PPP project involves importation of goods into Norway, it is important to note that only the owner of the goods at the time of  import is normally allowed to recover the import VAT.

If the foreign contractor (or a foreign subcontractor) is responsible for the importation of goods in connection with a PPP project, it should therefore be ensured that the relevant party is both; 1) the owner of the goods at the time of the import (i.e. imports the goods for use in  its VAT liable activities), and 2) formally acts as the importer of record in accordance with the import declarations.

In addition, a foreign established contractor which is responsible for the importation of goods into Norway, would not be entitled to deduct the import VAT until it has been effectively VAT registered. Hence, applying for a pre-registration in the VAT register could also be highly relevant for this reason (see our comments under “VAT registration for PPP participants” above). 

Accounting of PPP projects

Under Norwegian accounting laws, an enterprise may report its stand-alone statutory financial statements under either Norwegian generally accepted accounting standards (NGAAP), IFRS as adopted by the EU or a «simplified IFRS». (IFRS as adopted by the EU is used on scope, recognition and measurement, and less complex NGAAP requirements on disclosures with some exceptions). Typically, simplified IFRS is used in an enterprise where the group reports under IFRS, and therefore used by several foreign enterprises in Norway.

NGAAP have no specific guidance or interpretation for PPP projects, and the general principles of NGAAP is applied. An analysis of the risk and reward of the PPP project should be performed. Such analysis will result in one of two outcomes, similar to the application under IFRS and IFRIC 12. Either a construction project where the enterprise receives a financial asset (and an unconditional right to receive cash from the government), or an intangible asset if the enterprise partner has a right to charge users of the public service (no unconditional right to receive cash is granted). So far in Norway, PPP projects are normally accounted for with the financial asset model. 

A PPP project may have several performance obligations for both the construction and operating phase. Also, the transaction prices of each performance obligation may be complex, with both fixed and variable elements. A detailed mapping and analysis of the identified performance obligations must be performed to ensure appropriate revenue recognition. However, in general terms, revenue for the construction phase is recognised over time with the progress of the construction of the project, building up a financial asset in the enterprise. Potential milestone payments in the contract will normally have no impact on the revenue recognition, only reducing the size of the financial asset. This can differ from the revenue recognition under the tax rules, resulting in deferred taxes in the enterprise.

Depending on the type of PPP project, general or specific accounting rules may apply, and a detailed analysis of the PPP project, its contract and expected activities in the enterprise should be performed to identify and assess its impact on the enterprise’s financial statements.

PwC has extensive experience from being tax and accounting adviser on PPP-projects with full-range advisory services covering tax, VAT and accounting.

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This blog post is written by Anders Gausemel Merkesdal, Erik Stenvik Granly, Lars Walby, Jacob Gjerdrum Nordby, Jennifer Wong and Simen Horne Stokka.