On 28 September, the Støre government presented a proposal to increase the tax burden on the aquaculture, wind power and hydropower industries. The changes involve, among other things, the introduction of resource rent tax on aquaculture and wind power, as well as tightening of the resource rent tax on hydropower. Below we will explain the changes that have been proposed for the wind and hydropower industry.
Resource rent tax on land-based wind power and increased production tax
The government proposes to introduce a resource rent tax on land-based wind power, i.e. a special tax on earnings from onshore wind. For new power plants, the resource rent tax is designed as a cash flow tax. This means that income and investments are taxed continuously in the year they are earned/incurred. An effective resource rent tax rate of 40% is proposed. As corporation tax is calculated before resource rent tax, and resource rent-related corporate tax is deducted in the base for resource rent tax, the formal resource rent tax rate will be set at 51.3%. For existing power plants, the investment cost will be deducted on an ongoing basis through ordinary depreciation on remaining tax values.
The tax base for income from power production is, as a general rule, determined on the basis of spot market prices, regardless of what price the owner of the power plant has actually achieved. The proposal, however, provides for an exception for power production that is sold through existing power agreements with a fixed price entered into before 28 September 2022. In such cases, the power production is valued at the contract price. Exceptions will also be considered for power linked to more precisely specified fixed price agreements in line with the proposal from the government. If the resource rent tax is designed similarly to that for hydropower, power sold on long-term contracts to certain forms of power-intensive industry will also be able to be valued at the contract price. It is proposed that income from the sale of guarantees of origin and electricity certificates is also included in the resource rent tax base.
Negative calculated resource rent income can be carried forward with interest and be deducted from positive calculated resource rent income in subsequent years.
If it is assumed that the resource rent tax is designed as for hydropower, there will be no occasion to make deductions for financial costs or costs for renting land. In modern, loan-financed wind power plants, this will mean that significant cost items cannot be deducted from the income that is subject to resource rent tax. Assuming this is the government's intention, the actual earnings in current and future wind power projects, compared to large and partially paid-off hydropower plants, have not been taken sufficiently into account.
In addition to the introduction of resource rent tax, the government proposes to introduce a new natural resource tax set at NOK 0.013 per kWh, while at the same time it is proposed to increase the production tax from NOK 0.01 per kWh of production to NOK 0.02 per kWh of production. It is proposed, however, that the natural resource tax and the production tax should be made deductible in the fixed resource rent tax. The introduction and increase of natural resource tax and production tax should thus only involve a redistribution of income between the state and the municipalities, and not a real additional cost for companies in tax position for resource rent tax.
The obligation to pay resource rent tax will apply to wind power plants that are subject to licensing under the Norwegian Energy Act. That is, wind power plants that have more than 5 turbines or an installed output of 1 MW or more. The proposal is estimated to result in increased tax revenue of approximately NOK 2.5 billion annually. The government wants the income from land-based wind power to benefit the municipalities where the activity is carried out to a greater extent, and therefore proposes that the income from the resource rent tax be distributed equally between the state and the municipal sector.
The government justifies the tax increase by arguing that Norwegians have contributed to financing the development of the wind power industry through green certificates, the tax bill and the price of electricity. The government therefore considers it natural that the industry should contribute more in taxes when the industry has entered a phase with higher profitability and lower costs.
It is proposed that the resource rent tax be introduced with effect from 1 January 2023, and the proposal will be sent out for consultation before the turn of the year. We recommend that the wind power industry gets involved in the detailed design of this tax, so that the unfortunate aspects are made visible if such a tax is designed identically to the tax for hydropower.
Tightening of the resource rent tax on hydropower
With effect from 1 January 2021, the resource rent tax for hydropower production was changed to a cash flow tax with an effective tax rate of 37%. The government is now proposing that the effective tax rate in resource rent tax for hydropower increases from 37% to 45%. Furthermore, it is proposed that income from the sale of guarantees of origin be included in the resource rent tax base for hydropower from 1 January 2023.
Resource rent tax on hydropower applies to hydropower plants with an output of over 10,000 kVA, and the proposal will thus not affect small hydropower plants that currently do not pay resource rent tax.
The increase in the tax rate from 37% to 45% is proposed to come into effect already from the income year 2022, and is estimated to increase income to the state by NOK 11.2 billion annually.
High-price contribution from wind and hydropower
The government wants to introduce an additional tax on wind and hydropower as a result of high electricity prices. A high price contribution is proposed, where a tax of 23% of the power price that exceeds NOK 0.70 per kWh is levied.
The high-price contribution must be calculated hour by hour in each price range, and limited to revenue from power production. The high-price contribution is calculated on the basis of the actual prices achieved by the taxable party. This means that production covered by contract exemptions in the resource rent tax, and other agreements on the actual delivery of a fixed volume at a fixed price (provided they can verify that agreements between related parties are on market), is valued at the contract price. For production volumes sold on the spot market, the actual price will be the spot price achieved in the corresponding period. Volumes delivered as concession power are valued at the concession power price. The government further proposes that for financial contracts entered into no later than 27 September 2022 in order to secure revenues in relation to sales at the spot market price, the tax is calculated on the basis of the price achieved, adjusted for gains or losses on the financial contract.
The government proposes that the high-price contribution should not be deductible in the corporate tax, and further assumes that it will not be deductible in the resource rent tax or property tax.
The high-price contribution will be introduced with immediate effect (28 September 2022) for hydropower plants subject to resource rent tax (total stamped output of at least 10,000 kVA). For wind power plants and other hydropower plants, the high-price contribution applies from 1 January 2023. The government states that the relationship with the Constitution's prohibition of retroactivity has been thoroughly assessed by the Ministry of Justice's legal department.
Fixed price agreements on electricity – the contract exception in the resource rent tax
The government is proposing changes to the resource rent tax on hydropower for fixed price agreements. The proposal means that the resource rent tax is based on the actual income of the power producer through the fixed price agreement, and not the spot market price, which is the general rule. The aim of the change is to facilitate better fixed price agreements for electricity for end users. The proposal is based on input from the power industry and has been subject to consultation. The detailed design of the rules will be laid down in regulations, with a goal of implementation on 1 January 2023.
The government assumes that the electricity suppliers should be able to offer standardized fixed price agreements for periods of 3, 5 and 7 years, with a maximum price mark-up on the fixed price the suppliers pay to the power producers. It is proposed that the maximum price mark-up be determined in regulations, and that it should be higher than NOK 0.005 per kWh, which was the basis of the consultation proposal from June.
The scheme is limited to agreements with a fixed volume, which simplifies reporting between the agreement stages. There is no requirement that the power must be resold to end users in the same price area.
The reduction in tax revenue is estimated on a very uncertain basis at approximately NOK 1.2 billion annually.