The resource rent taxation for onshore wind power announced on 28th September last year is now likely to be introduced. In the proposal for the State budget for 2024 issued on 6th October the resource rent tax was included, and although the State budget is not final but subject to political debate before being finally resolved, it is at this point likely that we will see the resource rent tax on onshore wind coming. The proposal includes some significant changes to the consultation paper that was issued earlier this year. We discussed the previous proposal in a blog post here
The resource rent tax on onshore wind power was originally intended to become effective for the income year 2023. However, the timeline was extremely tight, and in the consultation round 140 comments were submitted. Several of the comments urged the Government to postpone the introduction in order to better prepare and assess the consequences. The Government wisely listened to this and postponed the introduction of the tax, and a new proposal has now been issued. The new proposal has a lot of similarities to the original proposal, but with some notable exceptions.
Similarly to the original proposal the tax will still be designed as a cash flow tax, where immediate deductions are allowed for all (new) investments. Wind farms subject to concession (i.e. wind farms with more than 5 turbines or combined installed effect of 1 MW or more) will be liable for the tax.
The effective tax rate has been somewhat reduced from the originally proposed 40% to 35%. Industry players are arguing that the tax rate is still too high, and refer to, amongst other, that the resource rent tax rate for aquaculture was reduced from the proposed 40% to 25%, and calculations made by Statistics Norway show that there in total for the period 2010-2021 there has been no super profit in onshore wind (which is considered a prerequisite for resource rent taxation) - although 2021 in isolation show a super profit due to the extraordinary high power prices.
Transitional rules for existing wind farms
The proposal contains improved transitional rules for existing wind farms compared to the original proposal. Deductions for historical investments are now proposed to be granted based on the ordinary rules for asset depreciation. This was a major discussion point in the consultation round, especially since around 85% of the current onshore wind farms were constructed in the period 2017-2021 when an accelerated depreciation regime was in effect. The original proposal was without transitional rules, meaning that no additional deductions were to be granted to already acquired assets.
Unlike the original proposal, the tax value of existing wind power facilities upon entry into the new regime, will be calculated as if depreciations had been made according to the (maximum) ordinary depreciation rates, and not according to the accelerated depreciation regime in place from 2017-2021 (straight-line depreciations over 5 years). In addition, as ordinary depreciation will accrue over time and not immediately (as for new investments in a cash flow-based tax system) the deferment will be compensated through the introduction of an interest component (“interest adjustment”). The deduction related to the "interest adjustment" will be determined based on the average tax values of the assets on January 1st and December 31st in the tax year, multiplied by a benchmark risk-free interest rate set by the Ministry. The benchmark interest rate that has been used for the hydropower taxation is based on the annual average of the interest rate on treasury bills with 12 months remaining maturity from 2007 adjusted for corporate income tax. We expect the same methodology will be used for resource rent tax in onshore wind. For 2022 the rate would have been 1.7%.
It is positive that the Government has changed course on this issue and adjusted the proposal to take into account that the accelerated depreciation regime, which was depicted as a positive for the industry when introduced, would - without adjustments in the new resource rent regime - essentially have been a tax trap for investors who made use of accelerated depreciations in good faith. However, the tax will still have a somewhat retroactive effect as depreciations according to the regular depreciation regime will be deducted from the tax base before entering into the regime. As a lot of the assets in the wind farm industry are depreciated on asset group D, which entails 20% depreciation per year on a declining balance basis, this implies that many wind farms still enter into the resource rent regime with limited depreciable tax bases. This retroactive effect is heavily criticized by the industry, and we anticipate this being one of the key issues in the debate until the final budget is approved.
As for hydropower, revenue recognition is proposed to be based on spot market prices, but the contract price under agreements with independent parties entered into before September 28, 2022, will be respected. This is in line with the original proposal. Emphasis should be made on the limitation to independent parties, meaning that PPAs with associated parties will not be included in the resource rent regime, and power sold according to such agreements will be priced on a spot market basis. However, the Government has made the requirement somewhat less stringent by only requiring that there is an independent party somewhere in the contract chain. Meaning that if the power produced is sold under a PPA to e.g. the owner which then again has a PPA in place with an independent party, this last PPA may be taken into account for resource rent purposes, and the contract price according to the PPA with the independent party may be considered in the resource rent calculation.
This alternative seems to be best fitted in a situation where the wind farm only has one owner or the wind farm is owned by a group and the power is sold externally by a group member. It is somewhat uncertain how this alternative will play out in a partnership model, even if that is the basis for the Ministry’s comments in the proposal. Reference is made to the fact that in a partnership model the income of the partnership will be determined based on a net income model (as if the partnership was a separate taxpayer). Different agreements entered into by the partners will in a standard set up not be taken into account when determining the net partnership income to be allocated to the partners.
It is also difficult to see how this interpretation is recognised in the draft wording of the tax act. However, based on the proposal it seems clear that the idea is that the external price can be applied in one way or another.
Temporary exceptions from spot pricing are introduced for standard fixed-price agreements and for power agreements related to new projects concluded by independent parties during the period 2024–2030. However, the requirements for standard fixed-price agreements are rather stringent in terms of e.g. contract length, volume, contract parties and use of the power sold etc. Conditions will also be set for power agreements related to new projects, when the more detailed regulations for such agreements are presented. As over 50% of the wind power produced is already under long-term contracts, the exception for standard fixed price agreements will likely have limited relevance for the current wind energy market.
The exemption for certain long term agreements with the power intensive industry that is available for the hydropower producers is not applicable for wind farms, but the system with agreements for new projects will most likely be an appropriate alternative.
Negative resource rent income
As in the original proposal, the Government has not suggested a payout mechanism for negative resource rent income, which is the case in hydropower taxation. Instead, negative resource rent income will be carried forward with an interest rate set by the Ministry of Finance and deducted from future positive resource rent income from the individual wind power facility. The interest rate for hydropower is set at a risk free interest rate based on 12-months treasury bills, plus a mark-up of 2 points. We expect the same methodology will be used in relation to onshore wind taxation, however, the Government has signalled in the proposal that the interest rate for onshore wind will be without the mark-up.
This was heavily commented on in the consultation round, as a payout mechanism is necessary for the tax to be truly neutral. The Government argues that a payout mechanism may increase the risk of tax fraud, and that a lot of the investors in the onshore wind industry are foreign and that they therefore want to postpone introducing a payout mechanism until they have more experience with the regime for onshore wind. Further, the Government’s argument is that the Norwegian state is in any case a reliable creditor, and with an interest added to the carry forward value this will be a reasonable solution. However, experience from the hydropower industry imply that the industry and the Government have substantially different views of what is an appropriate interest.This debate is also highly relevant in terms of assets and the deferment of depreciations discussed above, especially since the interest rate in this relation has no mark-up. Prior to the payout mechanism and cash flow tax being introduced for hydropower this was a yearly debate, as the Government argued that a moderate interest rate is appropriate, while the industry argues that their return of investment requirements are significantly higher and that this should be accounted for. We expect the same discussion to arise in relation to onshore wind.
Further, for hydropower it is possible to offset losses (negative resource rent income) in one hydropower plant with profits in another hydropower plant with common ownership. No such possibility is proposed for onshore wind farms.
Elimination of High-Price Contributions for Hydroelectric and Wind Power
To redistribute more of the exceptionally high incomes from power production in certain parts of the country, a high-price contribution was introduced for hydroelectric power on September 28, 2022, and for wind power on January 1, 2023. The government now proposes to eliminate the high-price contribution with effect from October 1, 2023. Since this is only a proposal, power producers must continue to pay the fee until a final decision is presumably made in December. Overpaid fees will be refunded. As the power prices have been significantly lower this year compared to last year, this should have limited impact for the power producers, at least in the short term.
Increase in Production Tax for Wind Power but no natural resource tax
The production tax for wind power was introduced in 2022 with the aim of compensating host municipalities for the inconveniences of hosting wind power. Upon introduction, the tax was 1 øre/kWh. Starting in 2023, the tax was increased to 2 øre/kWh, and it is now proposed to be further increased to 2.3 øre/kWh. Assessed production tax is deductible in assessed resource rent tax, implying that the total tax cost of the wind farm should not be affected by the increase.
However, the production tax will be payable regardless of the economic result of the wind farm or if there is any payable resource rent tax to credit the production tax against. The production tax might therefore become a liquidity challenge for the power producers, and the only relief provided by the government is a carry forward system with a (low) interest component.
The natural resource tax included in the original proposal is removed in the new proposal. However, as this was proposed to be deductible in the assessed resource rent tax it will have no impact on the total tax payable for the wind farms, except for the positive liquidity effect related to not having to lay out the tax in a negative resource rent situation.
Offshore wind power is a priority area for the Government, and two maritime areas were opened for bidding in March this year. Offshore wind will not be included in the resource rent tax regime at this point. However, in order to ensure that domestic and foreign bidders are treated the same for corporate income tax purposes the Government has proposed some changes to the right to tax on the continental shelf and the 200 nautical mile exclusive economic zone. The proposed changes essentially imply that foreign investors should be liable to tax on the same conditions as domestic investors by expanding Norway’s tax jurisdiction to the continental shelf including the exclusive economic zone. However, the taxing rights may be limited by relevant tax treaties, which might be particularly relevant for foreign offshore wind service providers.
Overall the introduction of resource rent on onshore wind has been a politically contentious issue. Norway has a longstanding tradition of broad political compromises in relation to taxes, with thorough processes and consultations in order to ensure predictability for the taxpayers and a functioning tax system. In this regard the introduction of resource rent taxes on both onshore wind and aquaculture stands out. Much can be said for cutting through the red tape and avoiding the bureaucracy, however, in introducing major tax changes that will have a significant effect on whole industries a little bureaucracy may be called for. Especially when taking into account the green shift, and Norway's need for more renewable energy. Based on the media coverage over the weekend, the discussion on the onshore wind taxation is not over by a long shot, however, the discussion has been shifted from whether a resource rent tax should be introduced to the finer details of the tax regime, as it is now more or less certain that resource rent tax on onshore wind will be introduced. Going forward it will be interesting to see the effect this new tax will have on investments in onshore wind in Norway.
The content of the blog is intended as general information, and should not be considered legal advice. The content is often simplified and is not adapted to the recipient's specific situation. In addition, there may have been changes after the blog was published that are not reflected. We therefore recommend that professional assistance is sought. PwC does not take responsibility for any errors or omissions in the blog, including decisions that are wholly or partly based on the content.
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.
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.