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).
The government announced the changes during a press conferenceheld on Tuesday 31 August.
Minister of Finance, Jan Tore Sanner, said: “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”.
According to the government, 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.
Minister of Petroleum and Energy, Tina Bru, said: “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”.
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 per cent, but since corporation tax will be deductible from the special tax base, the special tax rate will technically increase to 71.8 per cent.
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 per cent).
The government noted that the proposed changes would not affect the temporary rules introduced in response to the corona pandemic, which will be phased out in accordance with the Parliament resolution.
The proposal will be circulated for public consultation within the next week.