The Norwegian petroleum tax system

The petroleum activities on the continental shelf are Norway's most important industry. The government's income from this industry, both as an owner (through Petoro and Equinor) and as a tax creditor, makes a crucial contribution to the national budget each year.

This article provides an overview of the Norwegian tax system for the petroleum industry.

In the taxation of petroleum activities, a fundamental distinction is made between upstream and downstream activities. 

The upstream activities include exploration, extraction and pipeline transportation of petroleum on the Norwegian Continental Shelf, while the downstream activities – slightly simplified – include the rest of the value chain for oil and gas from the continental shelf.

The downstream activities are subject to the ordinary Norwegian company taxation, and are taxed at the general corporate tax rate of 22%.

The upstream business is also taxed at 22%, but it is also subject to special tax under the Petroleum Tax Act 1975. The special tax is a resource rent tax that is imposed at a nominal rate of 56%. Thus, the overall effective tax rate for the upstream business is 78%.

This article covers key aspects of the tax rules that apply to the upstream business following the extensive changes introduced with effect from 1 January 2022. For the record, it should be noted that the article is not a complete presentation of the Norwegian petroleum tax system - depending on the circumstances, details that have been omitted may significantly impact the taxation of a specific company.

Ordinary company tax + special tax = petroleum tax

The Tax Act 1999's ordinary rules for corporate taxation are the starting point for taxation of the upstream business. Tax is thus calculated on the net profit each year, and income and expenses are included in the year they are earned or incurred. Accounting provisions are normally not tax deductible. 

The upstream business is subject to ordinary corporation tax of 22%, but it is also subject to a number of special rules laid down in the Petroleum Tax Act 1975. Apart from the special tax of 56%, the most important special rules relate to the tax treatment of investments, financial items, losses and tax refunds and the transfer of licenses on the continental shelf.

For tax purposes, all upstream activities that a company carries out are consolidated in that company. There is no separate taxation ("ring fencing") for operations on different fields/licenses on the Norwegian Continental Shelf or for different phases of the operations. 

Companies which carry out upstream activities on the Norwegian Continental Shelf, and are thus subject to the special rules in the Petroleum Tax Act 1975, are often referred to as "companies subject to special tax". We use this term in the following presentation.

Sequential tax – technical special tax rate

The petroleum tax is structured as a sequential tax system: 

For a company subject to special tax, the tax is first calculated on the ordinary basis (22%). 

This calculated tax amount is deductible in the special tax base (56%). It is therefore necessary to use a "technical special tax rate" of 71.8% in the calculation of special tax. This can be illustrated as follows:

Example:

Net income from the upstream business in Year 1 is 100. A total of 78 must therefore be paid in tax for Year 1.

Ordinary corporate tax is calculated first, at the 22% rate, i.e., 100 * 22% = 22. 

This tax amount of 22 is deductible in the special tax base. The special tax base is thus      100 – 22 = 78. 

Initially, one would think that the special tax would thus be 78 * 56% = 43.7. This is not correct: we know that a total of 78 must be paid in tax on the net income of 100. The special tax must therefore be 78 (total tax) – 22 (ordinary corporate tax) = 56.

To get from a special tax base of 78 to a tax amount of 56, one must therefore use a technical special tax rate of 71.8%: 78 * 71.8% = 56. 

The technical special tax rate of 71.8% is used in several key calculations related to the special tax.

Investments - expense recognition and capitalization

Companies subject to special tax will often have significant operating assets on the continental shelf, i.a., production facilities and pipelines. Many such companies will also have operating assets onshore, typically office premises and equipment. 

Costs for the maintenance of operating assets used in the upstream business are deductible against 78% tax, regardless of whether the assets are located on the continental shelf (offshore) or onshore.

For costs of acquisition and upgrading of operating assets, on the other hand, a distinction must be made between onshore and offshore:

For onshore operating assets, the ordinary tax rules in the Tax Act 1999 Sections 14-30 – 14-56 apply, even for such assets that are used in the upstream business: costs of acquisition and upgrading of the operating assets must be capitalized and depreciated. For most categories of such assets, depreciations are made according to the declining balance rules, whereas intangible assets are normally depreciated linearly over the life of the fixed asset, and depreciable leased assets are typically depreciated linearly over the lease period. Depreciation is allowed with effect for both ordinary corporation tax (22%) and special tax (56%).

For offshore operating assets, the special rules in the Petroleum Tax Act 1975 Sections 3 and 5 apply. Costs of acquiring and upgrading the operating assets are treated differently with effect for the ordinary tax base (22%) and the special tax base (56%), respectively:

In the ordinary tax base (22%), the costs must be capitalized and depreciated linearly over 6 years. 

In the special tax base (56%), the costs are deductible immediately in the year they are incurred.

Example:

Investment in an offshore operating asset in Year 1 is 100.

In the ordinary tax base (22%), 100 must be capitalized and depreciated linearly over 6 years. The depreciation in Year 1 is 100 / 6 = 16.7, i.e., a deduction of 16.7. This results in a tax amount in Year 1 of -16.7 * 22% = -3.7. 

In the special tax base (56%), the entire amount of 100 can be deducted directly. The special tax base will therefore initially be -100. However, we must deduct the tax amount from the ordinary tax base of -3.7 from the -100. The special tax base will thus be -100 – (-3.7) = -96.3. To calculate the special tax amount, we must use the technical special tax rate of 71.8%. The special tax will thus be -96.3 * 71.8% = -69.3.

Hence, total tax on the investment of 100 in the offshore operating asset in Year 1 is 

-3.7 + (-69.3) = -73, i.e., a tax deduction of 73.

In Years 2 – 6, the linear depreciation continues in the ordinary tax base. For each of these years, the tax on the investment of 100 in Year 1 is thus -3.7 in the ordinary tax base. At the same time, this tax is treated as "income" in the calculation of special tax, as the amount must be deducted in the special tax base. The special tax will thus be 3.7 * 71.8 = 2.7 in each of the years. Total tax per year will therefore be -3.7 + 2.7 = -1. 

Looking at the entire period Year 1 – Year 6 as a whole, the total nominal tax for the investment of 100 in Year 1 is the sum of -73 in Year 1 and -1 for each of Years 2 – 6 (5 years), i.e., -73 + (-5) = -78, resulting in a total deduction of 78 over the period.

Financial items

Section 3 of the Petroleum Tax Act 1975 also sets out special rules for the tax treatment of financial items.

The starting point is that all financial income and costs are only included in the ordinary tax base (22%). This applies to all types of financial income and costs, including interest, currency effects, gains and losses on financial instruments, etc.

However, deduction is also granted in the special tax base, i.e. with effect for 78% tax, for a calculated share of net interest costs on interest-bearing debt, including net currency effects on such debt. The deduction amount is calculated according to a formula specifically set out in the Petroleum Tax Act 1975 itself:

The deduction amount with effect for 78% tax is half of (net interest costs incl. net currency effect * depreciated tax value in the special tax base of operating assets in the upstream business) / average interest-bearing debt throughout the year: 

Example:

Net interest costs including currency gain/loss = 100

Depreciated tax value of operating assets in the special tax base = 1,000

Average interest-bearing debt = 2,000 

The interest deduction against 78% tax is thus: (100 * 1,000 / 2,000) / 2 = 50 / 2 = 25

Interest costs that exceed the calculated deduction amount (in the example: 100 – 25 = 75) are only deductible against 22% tax.

When the remaining tax balances for previous investments are fully depreciated, the depreciated tax value of operating assets in the special tax base will be low, as new investments are expensed directly in this base in the investment year, ref. above. Hence, in practice, only a small proportion of net interest costs will be deductible in the special tax base.

Transfer pricing

The core of transfer pricing is the general arm's length principle, which also applies in Norwegian law: The terms in transactions between related parties must be arm's length, i.e., correspond to the terms that would have been agreed between independent parties in an otherwise similar transaction. If the terms deviate from this, the Tax Authorities are authorized to make a discretionary assessment.

The arm's length principle is set out in Section 13-1 of the Tax Act 1975 and in Art. 9 of most of the tax treaties to which Norway is a party. In Norwegian law, the principle is generally applied in accordance with the OECD Transfer Pricing Guidelines. Transfer pricing is an important focus area in general, both in Norway and abroad.

Many of the companies subject to special tax are a part of larger, often international groups and have more or less extensive interaction with other companies in the same group. Transfer pricing is therefore a particularly important focus area for the Oil Taxation Authorities – they have estimated that approximately 90% of their work is related to transfer pricing.

The Norwegian Oil Taxation Authorities are aggressive in their approach to transfer pricing. There are many disputes related to transfer pricing, both within the administrative system and in the courts. 

Perhaps the most important area of ​​focus for the Oil Taxation Authorities is the transfer pricing of petroleum produced on the Norwegian Continental Shelf. Significant volumes are sold intra-group, often from the upstream company on the Norwegian Continental Shelf to the same group's trading company abroad. 

The Oil Taxation Authorities thoroughly review the transfer pricing in such sales, except for the sale of crude oil where a norm price has been set (ref. below). 

Other key focus areas for the Oil Taxation Authorities’ review of transfer pricing include financial transactions (loans, guarantees), services (administrative services, management services, technical services) and intra-group insurance (captive insurance). 

Unilateral, binding advance rulings on transfer pricing are generally not available in Norway. However, under Section 6-1 of the Tax Administration Act 2016, the Oil Taxation Office can, upon request, issue such an advance ruling in relation to the transfer pricing of gas. There have been only a few such requests. 

In principle, bilateral/multilateral advance pricing agreements (also called "APA") are available under the respective tax treaties.

Companies subject to special tax are also subject to transfer pricing documentation requirements set out in Section 8-11 of the Tax Administration Act 2016 and the regulations thereto. The company must submit form RF-1123 (overview of controlled transactions and balances) as part of the tax return and prepare transfer pricing documentation in line with the regulations. The documentation content requirements largely coincide with Chapter V of the OECD Transfer Pricing Guidelines, with some additional details. The company is exempt from these obligations only if the fair value of its total intra-group transactions in the income year is less than NOK 10 million and its total intra-group balances amount to less than NOK 25 million in the same year.

Norm price on crude oil

As mentioned above, transfer pricing of petroleum sales is a significant area of focus for the Oil Taxation Authorities.

As far as the sale of crude oil is concerned, this is to a large extent dealt with through the norm price system, set out in Section 4 of the Petroleum Tax Act 1975 and the regulations thereto. The norm price is an administratively determined price that replaces the actual sales price for Norwegian tax purposes - a "governed arm's length price". 

The norm price is set in arrears by the Petroleum Price Board on a quarterly basis. It is determined separately for crude oil from each individual field and for each day in the period. Norm prices are set for most of the producing fields on the Norwegian Continental Shelf. 

In the tax assessment, the taxable income of a company from its crude oil sales from a given field is determined by multiplying the company's number of units of crude oil from the field by the applicable norm price. If the actual sales price was higher than the norm price, the difference between the actual sales price and the norm price constitutes tax-free income. Correspondingly, if the actual sales price was lower than the norm price, the company is taxed at 78% for a higher income than what it has actually earned.

The Petroleum Price Board also has the authority to set norm prices for gas liquids (NGL) and natural gas. So far, norm prices have only been set for crude oil, except for a brief period when norm price was set on propane from Kårstø.

Losses and refunds

According to the ordinary Norwegian tax rules, a company can carry a loss in Year 1 forward to later years without time limitation, and without interest. 

For companies subject to special tax, this loss carry-forward right applies correspondingly with respect to the ordinary tax base (22%).

For losses in the special tax base (56%), however, Section 5 of the Petroleum Tax Act 1975 contains a very important special rule: the tax value of this loss (calculated using the technical special tax rate of 71.8%) is refunded to the taxpayer as a cash payment. The payment is made as part of the ordinary tax settlement the following year. This system is often referred to as loss refund, even though it is the tax value of the loss that is actually refunded, not the loss itself.

Example: 

Loss in Year 1 = -100

Total tax value of loss = -100 * 0.78 = -78

Amount paid as refund in Year 2 = -100 * (-71.8%) = 71.8

Remaining loss in Year 1 = -78 + 71.8 = -6.2. This amount constitutes a loss that must be carried forward in the ordinary tax base (22%) without interest. The amount is never refunded, but can be deducted against profit in later years.

In practice, the company thus has a claim on the Norwegian State for repayment of 71.8% of the year's loss. This claim can be pledged as security for loan financing. In practice, this has potentially great significance, particularly for companies that mainly carry out exploration activities, but also for companies with development projects and no net income. The opportunity to pledge the refund claim provides such companies access to loan financing to a greater extent and on better terms than what they would have had without this opportunity.

The refund system means that, in practice, a company will always have 71.8% of its losses covered, also in a case where the company ceases its upstream activities without having been in a taxable position (i.e., without having had net taxable income in any year). In such a case, however, the effective tax deduction for the last 6.2%, i.e., the loss carried forward in the ordinary tax base (22%), will typically be lost, as the company never obtains any income to deduct this remaining loss against.

License transfers

Any transfer of shares in licenses, and associated operating assets, on the Norwegian Continental Shelf must be approved by the Ministry of Petroleum and Energy. Approval must also be obtained from the Ministry of Finance as far as the tax effects of the transfer are concerned. This applies to both direct transfers, e.g., when selling a license share to another upstream company, and indirect transfers, e.g., where a parent company sells the shares in an upstream company to another parent company. 

Section 10 of the Petroleum Tax Act 1975 with regulations set out the tax effects of such a transfer. The main rule is that the transfer is made at full fiscal continuity, i.e., that all tax positions related to the license share and the associated operating assets that are transferred are assumed by the buyer without any changes. 

The transfer is carried out on an after-tax basis: the purchase price is not taxable income/gain for the seller, nor is it deductible/depreciable for the buyer.

The effective date for the transaction is normally 1 January of the year in which the transfer takes place, or 1 January of the following year.

If the conditions in the regulations are met, the Ministry of Finance's approval is automatically considered to have been given when notification of the transfer has been sent to the Ministry. If these conditions are not met, a separate application for consent must be sent to the Ministry of Finance.

Petroleum tax administration

In the first instance, the tax assessment for companies subject to special tax is carried out by a special tax office, the Oil Taxation Office. Administratively, the Oil Taxation Office is part of the Norwegian Tax Authorities’ Section for Large Business Enterprises. 

Upon request, the Oil Taxation Office has the right to issue binding advance rulings about the fiscal effects of a specific planned disposition. This is set out in Section 6-1 of the Tax Administration Act 2016. 

Administrative appeals against the Oil Taxation Office's decisions are handled by a special board, the Petroleum Tax Appeals Board. The Oil Taxation Office is the secretariat for the Petroleum Tax Appeals Board.

Decisions issued by either the Oil Taxation Office or the Petroleum Tax Appeals Board can be brought before the ordinary courts. The Oil Taxation Office represents the Norwegian State in such cases.

Under most of the tax treaties to which Norway is a party, the taxpayer has the right to demand that a mutual agreement procedure be initiated (also called "MAP") to prevent possible double taxation. When such processes concern companies subject to special tax, Norway is represented by the Ministry of Finance as the competent authority. However, the cases are prepared by the Oil Taxation Office in collaboration with the special section for tax treaty processes (the "MAP/APA Section") of the Norwegian Tax Authorities’ Section for Large Business Enterprises. 

Tax return, tax payment and settlement

For companies subject to special tax, the deadline for submitting the tax return is 30 April in the year following the income year. 

Transfer pricing documentation must be submitted within 45 days following a request from the Oil Taxation Office, i.e., no earlier than 15 June in the year following the income year, as requests can only be sent after the deadline for the tax return. The Oil Taxation Office will typically, on a routine basis, request transfer pricing documentation as soon as it has the right to do so.

Tax payments are made in installments. The installment tax is calculated based on the company's own calculation of expected income and costs in Year 1 and is paid in six installments – 1 August, 1 October and 1 December in Year 1 and 1 February, 1 April and 1 June in Year 2. It is possible to adjust the calculation of the installment tax with effect for the last three installments.

The tax settlement for Year 1 is carried out in December of Year 2. Installment tax paid is settled against the finally determined tax. Any refund of the tax value of a loss in the special tax base ("loss refund", calculated according to the 71.8% technical rate) is paid out as part of the same tax settlement. 

Temporary rules

In order to improve the liquidity of the upstream companies during the COVID pandemic, and to contribute to the maintenance of the level of activity in the oil service industry, temporary rules were given for the income years 2020 and 2021, ref. Section 11 of the Petroleum Tax Act 1975. 

The rules are still relevant, as they also apply to income years after 2021 for investments in offshore operating assets used in the upstream business. They apply to the extent that the operating assets are covered by a plan for development and operation ("PDO") or a plan for installation and operation ("PIO") (or an application for exemption from a plan or amendment of a plan) which is: i) approved by the Ministry of Petroleum and Energy after 12 May 2020, ii) submitted to the Ministry by the turn of the year 2022/2023 and iii) approved by the Ministry by the turn of the year 2023/2024. For such investments, the temporary rules will apply until production starts for the asset in question.

Under these rules, the investments in offshore operating assets used in the upstream business can be deducted directly with effect for the special tax (71.8%) in the investment year, as under the ordinary rules. In addition, an uplift (an additional deduction) can be claimed in the special tax (71.8%) which constitutes 17.69% of the investment amount for investments in 2022 and 12.4% for investments in 2023 and subsequent years. This amount can also be deducted directly in the investment year.

As far as the ordinary tax base (22%) is concerned, the investment amount must be capitalized (without the uplift) and depreciated linearly over six years.