In an 8 April 2022 press release (in Norwegian only), the Government has introduced its proposal for changes to the Norwegian Petroleum Tax system effective from 2022. The details are available in the White Paper, Prop. 88 LS (2021–2022) (Norwegian only) and, to a large extent, correspond to the proposal that was submitted for public consultation (Norwegian only) on 3 September 2021. The proposal suggests extensive changes to the current Petroleum Tax system.
Companies carrying out exploration, production and pipeline transportation of petroleum on the Norwegian Continental Shelf are subject to Special Tax under the Petroleum Tax Act, which entails the levying of Special Tax at a rate of 56% in addition to the ordinary corporate tax rate of 22%. Such companies are thus taxed at an aggregate rate of 78%.
The Norwegian Petroleum Tax system has long been subject to significant political attention and controversy. In June 2020, after lengthy debate in the Parliament, temporary amendments to the Petroleum Tax Act were introduced in order to improve petroleum companies’ liquidity during the COVID-19 pandemic.
In a press release issued on 8 April 2022, the Government has now introduced its proposal for alteration of the Petroleum Tax system. The proposal not only entails the termination of the June 2020 temporary amendments - it indicates that the Special Tax will be changed into a so-called neutral cash flow based taxation system.
– In conjunction with the changes to the petroleum tax, the Government will reinforce the efforts to prepare the society for lower income from the Continental Shelf than what we have become accustomed to. Through this alteration, we get a neutral Special Tax. This entails that investments made on the Norwegian Continental Shelf going forward, will be profitable in a socio-economic perspective, which is good for both the community and the climate, the Minister of Finance says.
The details of the proposal are set out in the White Paper, Prop. 88 LS (2021–2022). These are the main elements:
Effect from 2022
The Ministry of Finance suggests that the proposed amendments shall be effective from and including the 2022 income year.
Costs of investments on the Norwegian Continental Shelf under the June 2020 temporary rules will, however, still be subject to the temporary rules, with some technical changes.
During a transitional period, companies will thus have to adhere to three sets of rules: current rules for pre-2020 investments; the June 2020 temporary rules for 2020 and 2021 investments (and subsequent investments subject to the temporary rules); and the new rules for all other investments.
Technical increase in the Special Tax rate
Calculated ordinary corporate tax (22%) will be deductible in the Special Tax base. In order to maintain an overall tax rate of 78%, a technical increase is therefore made of the Special Tax rate from 56% to 71.8%. Example:
Income Subject to Special Tax: 100
Ordinary Corporate tax: 100 * 22% = 22
Special Tax base: 100 - 22 = 78
Special Tax : 78 * 71,8% = 56
Total tax: 22 + 56 = 78
Direct deduction of investment costs
Costs of investments in assets on the Norwegian Continental Shelf are deductible immediately against the Special Tax in the year of investment. The right to such deduction replaces the current depreciation and uplift. The amendment will only apply to new investments, not to investments subject to the June 2020 temporary amendments.
Similarly, gain upon realization of an offshore asset is taxable in the year of realization with respect to the Special Tax. Correspondingly, a loss will be deductible in the year of realization.
The investments shall continue to be capitalized and depreciated linearly over 6 years against the ordinary corporate tax.
Other assets in the upstream petroleum business shall continue to be depreciated under the ordinary rules (most often declining balance method).
The uplift is phased out
Investments made in 2022 or later will not generate uplift, unless they are subject to the June 2020 temporary rules.
For investments subject to the June 2020 temporary rules, the uplift rate is reduced from 24% to 17.69% in order to compensate for the technical increase in the Special Tax rate. The reduction incorporates both the increase in itself and the net present value effect of the investments being depreciated in Year 1 against the increased Special Tax Rate.
Investments made pre-2020 will still generate uplift, but the rate is reduced from 5.2% to 4.06% in order to take into account the increased Special Tax rate.
For investments made pre-2020 and subject to the temporary rules following the uplift amendment in 2013, the uplift rate is reduced from 7.5% to 5.85%.
General loss refund replaces exploration loss and cessation refund
The exploration loss refund and cessation loss refund systems are terminated. Instead, the tax value of new losses (both exploration losses and other losses) in the Special Tax (71.8%) is refunded. The general loss refund will be paid annually, as part of the ordinary tax settlement.
Taxpayers will have the opportunity to pledge the refund claim as security, similarly to the current exploration loss refund claim.
The ordinary corporate tax value of losses (6.2%) is not refunded - it must be carried forward without interest. For companies in the closing down phase, there is a risk that this tax value will never be recovered.
The tax value of losses and unused uplift incurred pre-2020 is repaid
The tax value of losses and unused uplift incurred during the income years 2002-2019 will be repaid as part of the tax settlement for the 2022 income year (i.e., in Q4 2023), with effect for both Special Tax (at a 56% rate) and ordinary corporate tax (at a 22% rate). This is suggested as a simplification of the transition to new rules.
Special Tax deduction for financial costs is phased out
The current rules allow for a Special Tax deduction of a share of total financial costs based on depreciated tax values in the Special Tax base. This system is retained, but in practice, it is almost completely phased out - as the investments depreciated linearly over 6 years are fully depreciated in 2024, only the tax values of relevant assets depreciated under the ordinary declining balance rules will remain in the Special Tax base.
Transitional rule for unrealized currency gains and losses
In the September 2021 consultation paper, it was announced that a transitional rule for unrealized currency gains and losses should be implemented. This has been abandoned in the proposal - the Ministry of Finance proposes not to proceed with such transitional rule.
The own/lease regulations are terminated
The so-called own/lease regulations from 1997 allow for approximately the same tax treatment of leasing a production asset on the Norwegian Continental Shelf that would apply to owning the same. The regulations have never been applied in practice, and it is suggested that they are now terminated.
Jeg heter Øystein Andal og er advokat i Advokatfirmaet PwC. Med bakgrunn fra bl.a. Oljeskattekontoret og Advokatfirmaet Harboe & Co AS, har jeg mange års erfaring innen nasjonal og internasjonal bedriftsbeskatning.
Mine spesialområder er internprising og petroleumsskatt, og jeg bistår både store og små bedrifter i problemstillinger innenfor norsk og internasjonal skatterett.
Ta gjerne kontakt om du har spørsmål, kommentarer eller innspill.
My name is Øystein Andal, and I am an attorney with PwC. With a background from the Oil Taxation Office and the Law Firm Harboe & Co AS, I have several years of experience in national and international corporate taxation.
My specialties include Transfer Pricing and Petroleum Taxation, and I support both small and large businesses on issues related to national and international tax law.