On April 8, 2022, the Norwegian Ministry of Finance proposed significant changes to the tax rules governing the Norwegian oil sector. The proposed rules were largely in line with the proposal that was circulated for public consultation by the former Norwegian government in September 2021. The proposals are expected to be adopted and enter into force from 2022.
Under the current tax regime, the Norwegian petroleum sector is subject to both the ordinary corporate income tax (IRS) of 22% and a special petroleum tax at the rate of 56%. The latter applies only to companies engaged in pipeline transportation, exploration and production of oil. It is a resource rent tax that is conceptually similar to that which applies to the Norwegian hydropower industry.
Corporate tax and the special tax on petroleum products are based on profits. The basis for calculating the taxes is the income less the costs of the petroleum activity. However, deductions based on the investment (“uplift”) in addition to straight-line depreciation apply for the calculation of the special tax on petroleum products. The government is of the opinion that this deduction may encourage companies to make investments which are not profitable from a socio-economic point of view.
According to the Norwegian Ministry of Finance’s proposal, the special oil tax is therefore converted into a neutral cash flow tax, where companies can make immediate deductions for the expenses incurred. The CIT standard to which companies are also subject will continue to apply, but with some modifications.
Main changes to the Norwegian oil tax regime
When calculating the special petroleum tax in the future, 100% of expenses relating to pipelines and production equipment or devices will be deductible in the year they are incurred, instead of being amortized on a straight-line basis over a period of six years. , as is the case today. The uplift deduction will also be removed.
This change will apply to investments made from 2022 onwards. The tax value of unused losses and increases incurred in income years 2002-2019 will be refunded as part of the tax settlement for income year 2022 (c i.e. in 2023).
When calculating the special petroleum tax, a deduction will be made for the IS calculated on ordinary income. The calculation of corporate tax on ordinary income will be based on the same costs and income that are included in the base for the special tax on petroleum products, but with some modifications. For example, operating assets which, according to the incoming rules, will be immediately deductible in the calculation base of the special petroleum tax will always be depreciated for the purposes of calculating corporate tax on ordinary income.
Since an IRS calculated on ordinary income will be deductible from the tax base for the special tax on petroleum products, the tax rate for the special tax on petroleum products is technically increased to 71.8% from 56% . The reason for this is that the current effective tax rate of 78% could not be maintained if it were possible to deduct corporate tax on ordinary income at 22% and if the rate of the special petroleum tax remained at 56%. .
The reimbursement system for exploration losses and liquidation losses is also abolished. Instead, the tax value of new losses (both exploration losses and other losses) in the special tax on petroleum products is refunded at a rate of 71.8%. The general refund of losses will be paid annually, as part of the regular income tax settlement.
Current rules allow interest expense to be deducted based on a formula for apportioning interest-bearing debt to amortized tax values when calculating the special tax on petroleum products. These rules are preserved. However, the Ministry of Finance expects the deductions to expire within a few years, when old investments and tax bases will be fully depreciated.
The Ministry of Finance expects the new rules to improve the liquidity of companies subject to the rules, ensure socio-economically viable investments and provide the oil sector with stability and predictability. However, taxation of the Norwegian oil sector is expected to remain politically controversial.
While the new rules are likely to benefit the liquidity of companies with commercially viable finds, some companies could be negatively affected. The new rules will negatively impact exploration companies without commercially viable discoveries, as ordinary income losses will not be paid as under the current rules. Only 71.8% of the costs will be reimbursed, instead of 78% as things currently stand.
Additionally, businesses with business closure costs will, in some cases, only receive a 71.8% reimbursement of the costs. This would be the case for the costs related to the closure of the last oil field, if the company has no other income in the year of the closure and the two preceding years.