Norway: Revised proposal for a new petroleum tax system

The Norwegian government on 8 April 2022 unveiled proposals that would amend the current petroleum tax system and move it toward a cash flow-oriented tax system.

The proposal generally follows a consultation paper presented in 2021 and the government’s “draft” proposals presented in September 2021 for rather significant changes to the petroleum tax system. Read TaxNewsFlash

The April 2022 proposal is, to a large extent, similar to the initial proposals of September 2021, at which time, it was proposed that the special tax under the petroleum tax system be changed to a more cash flow-oriented tax. One key difference from the previous proposal is that under the recent proposal, it would be possible to “mortgage” a refund of the tax value of losses in the special tax basis (including any “uplift”), but the temporary rules with negative installment tax would be discontinued from and including 2022. 

The revised proposal is expected to be decided and possibly approved by Parliament before July 2022, and if enacted, effective beginning 1 January 2022. Some tax professionals believe that the recently proposed changes could be approved—possibly with only minor adjustments.

Under the current regime, the special tax rate is 56%, and the corporate tax rate is 22%. Depreciation is applied using a six-year straight line basis for both special and corporate tax with an extra tax allowance (uplift) of 20.8% (that is, taken over four years at 5.2% per year) for the 56% special tax rate. Tax losses are subject to interest adjustments and are protected with various refund mechanisms, including a yearly refund allowed for exploration losses.

In addition, certain temporary tax incentives were introduced for 2020 and 2021 as well as some grandfathering rules for later investments. The key elements were a direct expense of offshore exploration and production (E&P) investments for special tax purposes, with a 24% uplift allowance in the year of investment. In addition, there has been a mechanism for a refund of the tax value of losses under the special tax (including uplift) and corporate tax—i.e., one not limited to exploration losses. 

The purpose of the proposed changes is to improve the “neutrality” of the petroleum tax system, and to better determine that development projects are profitable before tax (as well as after tax). The current tax allowance for investments when the government covers approximately 88% of the capital expenditure (capex) through the tax system is considered too generous. Under the proposal, the government would cover about 78% (i.e., equal to the income tax rate of 78%), but deductions for offshore E&P investment would be accelerated and allowed a refund for the tax value of special tax losses.  

The revised petroleum tax system would have the following key elements:

• Investments in offshore E&P assets could be expensed for special tax purposes when costs are incurred (contrary to the six-year straight line depreciation under the current system).
• No uplift would be allowed for offshore E&P assets.
• The tax value of losses under the special tax (including potential unused uplift from previous and temporary rules) would be paid out as a part of the ordinary yearly tax settlement (in December of the year following the income year).
• As a part of the transition to a new system, the tax value of losses as of 31 December 2021 would be refunded. This would apply to special tax losses (including any unused uplift) and corporate tax losses. The refund would be paid out in December 2023 as a part of the 2022 tax assessment.
• A “calculated” offshore corporate tax would be deductible when calculating the special tax basis. The deductible corporate tax would be calculated using the special tax basis as a starting point, but with the following key adjustments:
  • Any uplift would be disregarded.
    
  • There would be continued six-year depreciation for corporate tax (offshore assets) for offshore E&P investments from 2022 and later.
  • A +/- adjustment for gains/losses would be allowed upon realization of offshore assets when there is a direct and immediate taxation for special tax, but when the gain/loss would be taken into account over six years when calculating the corporate tax basis.
    
    With these adjustments, a taxpayer would get a “calculated” corporate tax basis multiplied by the corporate tax rate of 22%—which then would be used as a deductible item for calculation of the special tax basis.  
     
• If the calculated corporate tax is a negative amount, the “negative tax” would be carried forward for later deduction against a future positive calculated corporate tax. However, if the corporate tax loss offshore is used to reduce onshore income, a negative corporate tax would be calculated for special tax purposes.
  
• As a consequence of the deduction for the offshore corporate tax (a 22% tax rate), there would be a technical adjustment of the special tax rate from 56% to 71.8% in order to keep the tax rate at 78% (22% + (1 - 0.22) x 0.78 = 78%).
• For corporate tax, the current six-year straight line depreciation would be continued, but there would be no refund mechanism for corporate tax and no interest adjustments. Losses could be carried forward indefinitely, and with a two-year carryback upon cessation of business.
• The current exploration refund and the right to tax refund for losses at cessation of the E&P business would be repealed. This would apply only for corporate tax, given the new yearly refund mechanism for the special tax.
• The rather favorable temporary tax incentives introduced in 2020 (a COVID-19-related initiative) would be continued, and would also apply for new development projects filed for approval during the period between 12 May 2020 and 1 January 2023, and approved by the Ministry of Petroleum and Energy by 1 January 2024. The effect would be that such investments would be entitled to an uplift of 24% for investments through the year of the planned production start.
  
• As a consequence of the revised tax rate for the special tax, there would be an adjustment for the uplift rates as follows:  24% uplift (temporary rules) reduced to 17.69%; 5.2% uplift reduced to 4.06% (investments made 2019 with last uplift of 2022); and 7.5% uplift reduced to 5.85% (investments covered by grandfathering rules of 2013).    
  
• There would be no changes with respect to financial costs, and the current allocation rules (tax asset value at year-end x 0.5/average interest bearing debt = share of 78% tax coverage) would be continued. However, as the asset tax value for allocation is the special tax basis, the direct expense would mean a zero (0) tax value of offshore investments made during the income year. Thus, the part of the financial costs allocated for the full 78% deduction would quickly diminish, even though companies may have some onshore type assets subject to declining or straight line depreciation also for the special tax basis. Such assets would still have a certain tax value. 
• There would be no changes with respect to removal costs, which means that there could be a risk that companies with abandonment costs and without further income would only have coverage for the 71.8% special tax. The same would apply for other companies that generate corporate tax losses without establishing sufficient income (e.g., unsuccessful exploration companies).
  
• The proposed rules also could possibly have some effect on the after-tax and tax-continuity concept for transactions involving licenses on the Norwegian continental shelf (Petroleum Tax Act section 10), and on certain incentives regarding transfers from companies with corporate tax losses to companies with positive taxable income for corporate tax. The proposals do not propose any changes to the tax rules for direct and indirect license transfers but refer to the general tax act section 13-3 which authorizes the tax administration to adjust transfers that are mainly motivated by tax reasons. This means that transactions when the main motive is to transfer losses for tax reasons could be denied. The Ministry of Finance indicated that this determination would be left up to the Oil Taxation Office to consider (i.e., that this would not be covered by a section 10 ruling). It would, however, be possible to obtain an advance binding ruling.

As noted earlier, tax professionals believe that the proposed changes could be approved by the Parliament this summer and would be effective from and including 2022.

In general, the new system (as proposed) would over time result in a higher tax liability—particularly due to the reduced investment allowance (uplift)—but it also would improve neutrality. The protection for the tax value of losses would be reduced from the current 78% (+tax value of any unused uplift) to the 71.8% rate (+the tax value of any uplift still applicable). This could particularly be negative for pure exploration companies and for some removal projects that may not realize sufficient income to cover corporate tax losses. The fact that yearly tax losses for special tax would be refunded with its tax value and would be subject to “mortgage” could make it easier with external financing and could improve liquidity.

With the proposed changes, there would be, for some years, three different set of rules related to investment allowances—(1) the current ordinary petroleum tax rules; (2) the temporary rules for 2020 and later years (COVID-related incentives); and (3) the new system effective for investments made in 2022 and later years (unless covered by the temporary rules).

Even though the new system would be more complicated—particularly for approaching years when the temporary tax incentives would also be a part of the system—observers believe the new system would be a positive development for the petroleum tax system.

For more information, contact a KPMG tax professional in Norway:

Per Daniel Nyberg | per.daniel.nyberg@kpmg.no

Jan Samuelsen | jan.samuelsen@kpmg.no

Jonas Odland | jonas.odland@kpmg.no