On 31 August 2021, the Norwegian Government announced that it will propose certain amendments to the Norwegian petroleum taxation system, introducing a cash-based tax system. On 3 September 2021, the Norwegian Ministry of Finance circulated a consultation paper setting out the proposed changes in more detail. The deadline for filing remarks to the proposal is 3 December 2021.
Key features of the current petroleum taxation system
The key features of the current petroleum taxation system can be summarised as follows:
- The marginal tax rate on upstream petroleum activities on the Norwegian continental shelf is 78%, including a corporate tax base with a tax rate of 22% and a special tax base with a tax rate of 56%.
- Companies subject to the petroleum taxation system are entitled to linear tax depreciations of upstream investments over a period of 6 years with a tax value of 78%. In addition such investments trigger additional tax deductions ("uplift") in the special tax base.
- Tax losses are carried forward with an interest compensation in order to maintain their value.
- The tax value of exploration costs are refunded annually and the tax value of tax losses carried forward are refunded when E&P activities cease.
In 2020, temporary petroleum tax provisions were introduced to mitigate the effects of COVID-19. The temporary provisions provided for immediate tax deductions for upstream investments and an increased uplift in the special tax base. These temporary provisions apply to all investments made in 2020 and 2021 and certain investments in subsequent years related to projects where a plan for development and operation (PDO), a plan for installation and operation (PIO) or certain other plans for approval are filed before 1 January 2023 and approved by the Ministry for Oil and Energy before 1 January 2024.
Key features of the proposed changes
The intention is for the proposed changes to become effective from 2022 and the main elements of the proposal can be summarised as follows:
- The marginal total tax rate of 78% on upstream petroleum activities on the Norwegian continental shelf will remain unchanged.
- The corporate tax paid will be a deductible expense in the special tax base. The marginal tax rate of 78% will be maintained by increasing the special tax rate to 71.8%.
- Upstream investments will be fully deductible in the special tax base in the year they have incurred and will be subject to ordinary tax depreciations in the corporate tax base.
- The current uplift provisions will be abolished.
- Tax losses carried forward in the special tax base will be refunded annually. Tax losses carried forward in the corporate tax base will not be refunded, and will be carried forward without interest compensation.
- The current regimes of exploration refund, cessation refund and interests on tax losses carried forward will be abolished.
- The tax value of all tax losses and unused uplift carried forward as of 31 December 2021 will be refunded by the Norwegian State, in connection with the implementation of the new tax system.
The proposed changes will not apply to investments comprised by the temporary provisions introduced in 2020. This means that during a transitional period from 2022, three different sets of rules will be applied in tandem; (i) investments made in the period 2016 – 2019 will be subject to tax depreciations under the existing tax regime (until and including 2024), (ii) certain qualifying investments from 2020 onwards will be comprised by the temporary provisions introduced in 2020 and (iii) investments made after 2022 (and not comprised by the temporary provisions) will be comprised by the new tax regime.
The Ministry of Finance is aiming for submitting the necessary statutory amendments to the Norwegian Parliament sometime in the first half of 2022 and the ambition is that the changes shall apply to investments made as of the tax year 2022, with the exception for investments covered by the temporary tax rules implemented in connection with the COVID-19 situation, cf. above.
The initial reactions from the industry and the political community have been modest, but recently both the largest opposition party (the Labour Party) and the key interest organization for the E&P companies active on the NCS - Norwegian Oil and Gas (Nw: Norsk olje og gass) - have announced that they support the main elements of the proposed changes. Hence, regardless of the outcome of the upcoming Norwegian parliamentary election on 13 September 2021, it seems likely that that there is sufficient support for the key elements of the proposal for this to be implemented. There may of course be certain adjustments to the proposal following the consultation process and there is also a possibility that implementation of the new provisions can be deferred.