ESA will decide whether to open case or not by August 2018.
The complaint is a consequence of changes to the petroleum tax act in 2005 concerning:
- that oil companies were given a right claim annual refund of the tax value (78%) of exploration costs incurred in connection with oil & gas activities on the Norwegian Continental Shelf (NCS) (Refund Scheme), and
- that oil companies were given right to claim refund of the tax value(78%) of the tax losses and unused free income upon cessation of its petroleum activities on the NCS (Cessation Refund Scheme).
By implementing these changes the Norwegian State in reality guaranteed for 78% of all investments on the NCS. However, the changes have also stimulated activity and investments on the NCS, as the refund arrangements have been attractive to investors and new oil companies.
In order for the Refund Scheme to constitute unlawful state aid under the EEA-Agreement, four conditions must be met:
- The recipient must receive an economic advantage;
- The advantage must be financed through state resources;
- The aid must favour certain undertakings or the production of certain goods (selectivity); and
- The aid must distort competition and affect trade within the EEA.
The crucial questions in Thommessen's assessment are related to criteria (i) and (iii).
If ESA (and ultimately the EFTA Court) concludes that there is state aid, this will as a starting point be categorized as a so-called "new" and unlawful state aid, since it was introduced after the implementation of the EEA-Agreement in 1994. Unlawful aid shall be recovered (10 years limitation period).
When deciding whether the Refund Scheme entails an economic advantage and whether it is selective, it is imperative to have a proper understanding of the background and content of the Norwegian petroleum tax rules. A main challenge with the tax system before 2005, was that it favoured established players on the NCS who were in a tax position and that it did not provide the appropriate incentives for new players to invest on the NCS. Established players could set off the exploration costs etc. directly against deductions in taxable income from current production. As oil and gas investments are very capital intensive and with a long lead period from investments and discovery to production and income, new players had a clear disadvantage. The Refund Scheme and the Cessation Refund Scheme were tools developed to mitigate this situation.
This case involves greater values than the normal EEA state aid cases, and concerns the ownership to oil and gas on the NCS and the EEA-Agreement's relationship to special tax legislation.
Thommessen's lawyers have broad experience with the exploration refund scheme and the petroleum taxation scheme from the perspective of EEA-law, petroleum law, tax law and mortgage and securities law. Thommessens's lawyers are among others acting as litigators in a case before the Oslo District Court concerning the Refund Scheme.
Advokatfirmaet Thommessen therefore invites to a breakfast seminar in Stavanger Friday 16 March 2018, where the Refund Scheme and the ESA-case will be presented. We will then discuss potential consequences a possible ESA decision may have for the state, the oil companies, the supply industry and lenders.