Today, 8 April 2022, the Ministry of Finance put forward Prop. 88 LS (2021-2022) to the Storting with the Government’s proposal to amendments to the petroleum tax regime. The Government's proposal reflects the main elements in the consultation paper from 3 September 2021, with some adjustments which are discussed in more detail below.
Legislative proposals overview
Immediate tax deduction for investments – cash flow tax
The proposal entails immediate tax deduction in the special tax base of costs incurred for the acquisition of production facilities and pipelines as mentioned in the Petroleum Tax Act § 3 b second and third paragraph, which are currently subject to linear depreciation over 6 years. This is similar to the regime introduced for hydropower with effect from 2021.
The proposed amendment covers new investments made from 1 January 2022 onwards only that not covered by the temporary rules in the Petroleum Tax Act § 11. The Government does not propose any substantial amendments to the temporary rules, that will be phased out gradually in line with the decision from the parliament when enacting said § 11.
The proposal on immediate tax deduction for investments made from 1 January 2022 onwards covers deductions in the special petroleum tax base only. The Ministry of Finance has not proposed any amendments with regard to tax depreciation in the corporation tax base (ordinary income).
Discontinuation of the uplift scheme
Uplift shall compensate the companies for the fact that investments made under the current regime are tax deducted over several years. The rationale for uplift lapses if the proposed immediate tax deduction is implemented. Hence, the Ministry of Finance proposes in Prop. 88 LS (2021-2022) to repeal the uplift.
Annual pay-out from the state of annual tax loss for companies not in tax position
A key part of the proposal from Government is to pay out to companies not in tax position of the tax value of special tax (currently 56% and proposed 71.8%) of the tax loss the year in question, regardless of the type of expenses in the petroleum business the loss arises from, as well as unused uplift calculated under the temporary provisions in the petroleum tax act § 11 and the proposed transition rules. The Government proposes that that this should take effect from the income year 2022.
The proposal implies that a pay-out could take place in connection with the tax assessment in the autumn the year after the income year. This part of the proposal means that most companies will need an intermediate financing, as a pay-out could take place about 8-10 months after the end of the income year it relates to. Many of the companies liable to special petroleum tax argue in their comments to the consultation paper that in order for a company to be able to receive an intermediate financing, the ability to pledge the company’s claim for future pay-out as security for such loan will be necessary. The Government agrees with the industry and propose in Prop. 88 LS (2021-2022) to allow the companies to pledge their claims toward the state for a pay-out of the special tax value of loss carry forward.
Tax rates
The proposal in Prop. 88 LS (2021-2022) implies that the 22% corporation tax shall be deductible in the basis for calculation of special petroleum tax. Because the basis for calculation for special petroleum tax thereby will be reduced, the Government propose to increase the special petroleum tax rate from 56% to 71.8% in order for the marginal tax rate to remain 78% (22% + (1 – 0.22) x 71.8% = 78%).
Because of the increased special petroleum tax rate, the uplift in the temporary rules in the petroleum tax act § 11 and remaining uplift from investments made prior to 2020, must be adjusted downward. The Government proses the uplift rate under the temporary provisions in the petroleum tax act to be adjusted downward to 17.69%. For investments made prior to 2020., the Government proposes to adjust the uplift rate downward to 4.06%, which is in line with the proposal in the public consultation paper.
Termination of exploration refund scheme and discontinuation refund scheme
Under the current petroleum tax legislation, companies not in tax position may, in their annual income tax returns, claim a refund from the state of the tax value of direct and indirect costs, except financial charges, incurred in exploration for petroleum resources – the exploration refund scheme. Companies have furthermore the opportunity to claim the state for the tax value of losses carried forward upon discontinuation of petroleum activities on the Norwegian Continental Shelf – the discontinuation refund scheme.
In the consultation paper the Ministry of Finance proposes to terminate both the exploration refund scheme and the discontinuation refund scheme, and this part of the proposal is maintained by the Government in Prop. 88 LS (2021-2022). The current refund schemes will be superfluous in the proposed new system with immediate expensing and annual pay-out to companies not in tax position of the tax value of special tax of the tax loss the year in question. We point out, however that the refund will be limited to 71.8%, compared to 78% under the current refund schemes. The remaining 6.2% will have to be deducted in corporate tax if or when the tax base is positive.
Interim rules and petroleum tax act section 10
The Government proposes that that main element concerning continuity in transactions covered by the petroleum tax act section 10 shall be continued. The Government proses however to introduce a legal basis for the Oil Taxation Office to use the provision in the general tax act § 13-3 for sec. 10 approvals granted after 8 April 2022.
The Government does not propose interim rules and regulations for unrealized currency gains and losses. The tax value of unused loss carry forward and unused uplift is proposed to be paid out to the companies in connection with the tax assessment for income year 2022.
The Governments proposes that the amendments to the petroleum tax regime shall have effect from income year 2022.
