In a 31 August 2021 press release (in Norwegian only), the Government introduced its proposal for alteration of the Norwegian Petroleum Tax system effective from 2022. The proposal involves fundamental changes to the current tax system. It was submitted for public consultation (Norwegian only) on 3 September 2021.
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 31 August 2021, the Government 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 a so-called cash flow based taxation system will replace the current system.
– The alteration will better adapt the tax system for the oil and gas industry to the development on the Norwegian Continental Shelf during the coming years. The changes will entail that the terms of taxation are tightened and have a more neutral effect on the investments. At the same time, we prepare for providing the companies with predictable framework conditions, says Minister of Finance Jan Tore Sanner (Conservative)
The proposal was submitted for public consultation on 3 September 2021. 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.
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:
Direct deduction of investment costs
Costs of investments 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).
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 18.72 % in order to compensate for 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.
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.
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.
In the consultation paper, the Ministry of Finance requests input on the need for and proper designing of a system allowing for the loss repayment to be pledged as security.
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, with effect for both Special Tax (at a 56% rate) and ordinary corporate tax. 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 consultation paper, it is pointed out that the announcement of new rules will provide the companies with tax incentives for accelerating the realization of currency losses and postponing the realization of currency gains. Therefore, a transitional rule for currency gains and losses should be implemented.
The Ministry of Finance considers suggesting that all unrealized currency gains and losses as at 31 December 2021 shall be taken to income/deducted in 2021, but requests input on this issue through the consultation.
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.