The Norwegian Government is proposing to revise the special petroleum tax system as of 2022, replacing the rules on depreciation and uplift with immediate investment expensing (cash-flow tax).
“This reorientation prepares the oil and gas tax system for the developments anticipated on the Norwegian continental shelf in the years ahead. The changes introduce stricter tax rules with a more neutral effect on investments. A further aim is to give companies predictable framework conditions,” says Minister of Finance Jan Tore Sanner (Conservative Party).
The switch to a cash-flow tax will have several positive effects. For the State, it means increased tax revenues in the longer term, as well as better alignment between how companies and society view profitability.
For affected companies, the proposal means a significant injection of additional liquidity. Whether the revised rules will increase or reduce corporate tax bills in the longer term depends on whether companies apply a high required return when valuing future deductions, as several companies currently say they do.
A predictable and neutral tax system for the long term
“Our aim is to ensure continued development of the Norwegian oil and gas industry, and predictable framework conditions are a critical factor for companies operating on the Norwegian continental shelf. It is therefore important to clarify at this early stage what tax rules will apply to investments on the shelf once the current temporary tax rules are phased out. I hope that the switch to a cash-flow tax we are now proposing will attract broad political support,” says Minister of Petroleum and Energy Tina Bru (Conservative Party).
Under the proposal, corporation tax will be deducted from the basis for calculating the special tax, mirroring the system used for the resource rent tax payable by hydropower enterprises. This will eliminate the need for special corporation tax rules on losses, and some adjustments are therefore being proposed to ensure that the corporation tax system applies as uniformly as possible across different business sectors.
The total tax rate will remain at 78%, but since corporation tax will be deductible from the special tax base, the special tax rate will technically increase to 71.8%.
The proposal also envisages eliminating the exploration cost tax refund because the special tax value of losses will now be settled in connection with the following year’s tax assessment. Moreover, there will no longer be a need for special corporation tax rules on losses. Any losses for corporation tax purposes will now have to be carried forward net of interest, as is the case for other industries. This may mean somewhat reduced short-term liquidity for some exploration companies, as they will have to wait until they have taxable income before they can exploit their residual exploration deduction for corporation tax purposes (6.2%).
Increased state revenues expected over time
In the longer term, the switch to a cash-flow tax model is expected to boost the State’s revenues by approximately NOK 7 billion with respect to investments made in 2022. However, the immediate expensing of investment costs means that tax revenues from the petroleum industry will fall for the first few years after the changes are made.
The proposed changes will not affect the temporary rules introduced in response to the Corona pandemic, which will be phased out in accordance with the Parliament resolution.
The valuation of future investment deductions has long been a topic of debate. Immediate expensing of the entire investment cost eliminates the room for disagreement about the value of the investment deduction. The special tax will be neutral, i.e., an investment that is profitable before the special tax is introduced will also be profitable afterwards, and vice versa.
The proposal will be circulated for public consultation within the next week.
Main elements of the proposed new petroleum taxation system:
- Investment costs (section 3b operating assets) will be expensed immediately for the purposes of the special tax. This will replace the current system of deprecation and uplift. The change will only apply to new investments, not investments covered by the temporary rules.
- Under the new special tax rules, the tax value of new losses will be settled in connection with the tax assessment. The consultation paper requests feedback on the need for and appropriate design of a system for pledging loss refunds.
- By way of transition to the new rules, the tax value of loss carry-forwards and unutilised uplift from earlier years will be settled for the purposes of both the special tax and corporation tax.
- Assessed corporation tax will become deductible from the basis for calculating the special tax, and the special tax rate will therefore technically increase from 56% to 71.8%.
- The exploration costs tax refund and the cessation tax refund will be eliminated from the corporation tax system, and losses will be carried forward net of interest.