Introduction of resource rent tax on onshore wind power
The law proposal is based on the Government’s proposal Prop. 2 LS (2023-2024), but includes some important changes:
- Effective resource rent tax is reduced from 35% to 25%
- A payment scheme for the tax value of negative resource rent income is implemented, but only from the time the wind power farm commences operations
- Transitional arrangements for existing wind power farms are improved by increasing the capitalized acquisition cost by 40%
Change in effective tax rate
The Government’s proposal included an effective resource rent tax rate of 35%. After negotiations in the Parliament the resource rent rate has been reduced to 25%. That is the same effective tax rate as for aquaculture (which was also reduced from 35% to 25% after negotiations in the Parliament). The effective resource rent tax will thus be lower than for petroleum (56%) and hydropower (45%)
Payment scheme for negative resource rent income for new wind farms
In the Government’s original proposal, tax deficits in the resource rent tax had to be carried forward at a risk-free rate against revenues in subsequent years or with payment upon subsequent cessation of the business operation. The payment scheme is now extended to include payments of resource rent tax deficits from the time the relevant wind farm has commenced operations and the Tax Administration has carried out a tax assessment. Until payment from the scheme, negative resource rent tax will be carried forward with interest as per the original proposal. The payment scheme is subject to ESA’s approval before it can be implemented because some fear such a payment scheme could be considered unlawful state aid.
This means that negative resource rent income accruing before completion of a wind farm, due to the direct deduction of investment costs in the resource rent tax base, still must be carried forward with risk-free interest until the wind farm commences operations. This differs from the resource rent regimes for petroleum and hydropower, where payment of the tax vale of deficits is made yearly. There will also be no provision for coordination of negative resource rent income between different wind farms, or between wind farm companies within the same group, as is the case for hydropower plants.
Changes in the capitalized acquisition cost for existing wind farm
For existing wind farms, the Government proposed that capitalized acquisition cost in the resource rent tax should be the historical cost reduced by maximum tax depreciations based on the declining balance method, also for wind farms what were covered by the temporary rules on linear depreciations over five years. The settlement includes an additional 40% step-up on this tax acquisition cost. The acquisition cost cannot however be higher than 85% of the actual historical cost paid for the investments. The adjusted acquisition cost is depreciated on a straight-line basis with deduction in the resource rent tax over 5 years. In addition, a deduction is given for a “waiting
interest”, as in the Government`s proposal, based on a risk-free interest rate (set by the Ministry) as a compensation for the net present value loss.
For ordinary corporate tax, the depreciations continue as before, without any changes.
Other main points in the final law proposal
The following from the Government`s original proposal is continued in the final law proposal:
- Immediate deduction of new investments
- The tax will apply to wind farms comprising of more than five turbines, or with a total capacity of 1 MW or more
- When calculating the basis for the resource rent tax, revenues from power production shall be set to the spot market price (hourly rate). Exception applies for power purchase agreements between independent parties (concluded before 28 September 2022), long-term physical power purchase agreements between independent parties (entered into in the time period between 2024-2030) and standard fixed-price agreements to end-users. In these cases, the income shall be set to the contract price. In the general corporate income tax, the achieved sales price is to be used as the basis for taxation.
- Increased production tax from 2 to 2.3 øre per kWh. The production tax can be credited from the stipulated resource rent tax
The way forward
The proposal will be processed by the Parliament on December 19, 2023, but due to the settlement, it will receive broad support. Since the proposal involves changes to the tax law, it must also be passed a second time, which will happen in early 2024. There is a discussion about the extent to which this causes illegal retroactive application of the law since the proposal takes effect from January 1, 2024, while law enactment number two only happens a few days later. Unsurprisingly, the parties have concluded that this is acceptable.
Significance of the Settlement
For existing wind farms, the introduction of resource rent tax is a dramatic change in the regulatory framework conditions. Reduced tax rate and somewhat improved transitional arrangement mitigate the negative aspects somewhat but are not sufficient to ensure profitability in line with the expectations one had before the resource rent tax was proposed. For new wind farms, it is positive that a payout scheme for negative resource rent income is introduced, even though such payment only occurs when the wind farm commences operations. This will likely contribute to easing the financing of new wind farms and improve the net present value. However, it is surprising that there are not ongoing payments as for hydropower and petroleum, especially considering that a concession is required to be covered by the regulations.
The fact that a broad majority in the Parliament stands united behind the law enactment is positive and will contribute to providing more predictable framework conditions for the industry.