Norwegian Supreme Court awards in favour of AS Norske Shell in petroleum tax case
The Supreme Court rendered its judgment in the tax case for AS Norske Shell on the tax treatment of R&D costs incurred as operator on the NCS.
ASNS has over the years been an active contributor to Norwegian R&D activities in line with the policies of the Norwegian State. The activities are relevant to the Norwegian petroleum sector, and the costs incurred are deductible in the petroleum tax basis for the company. However, the tax authorities found that the R&D activities also benefit the Shell-Group as such, and the costs should, under the arm’s length principle in the General Tax Act Section 13-1, be allocated to the Shell-group internationally on the same basis as the Group’s R&D activities are allocated under a Cost Contribution system. Approximately 85 % of the costs were disallowed for AS Norske Shell on this basis. This part of the assessment was confirmed in a judgment by the Court of Appeal 26 September 2019.
As Operator, AS Norske Shell is entitled to charge relevant R&D costs to the operated licenses under the standard Accounting Agreement. Over the years in dispute, it was used as an example that approximately 40 % of AS Norske Shell’s costs could be recovered from partners. The issue in the appeal’s case was whether the costs which are carried by the partners in the operator’s licenses could be included in the cost basis which was reduced in the discretionary assessment. The Court of Appeal ruled in favour of the State also on this point, but this part of the judgment was accepted to be heard in the Supreme Court.
The General Tax Act Section 13-1 establishes the arms’ length principle as a requirement in transactions between parties with a community of interests. Following changes to the provision adopted in 2007, the OECD transfer Pricing Guidelines shall be taken into consideration when applying the arms’ length principle. The Supreme Court held that the Guidelines are relevant when establishing the legal framework for a discretionary assessment pursuant to Section 13-1, and that the courts may try whether the assessment is based upon a correct factual basis and a correct understanding of the law.
In the case at hand, the relationship between AS Norske Shell and the Group was properly viewed as a Cost Contribution system, which is in line with the arms’ length principle and the OECD Guidelines. On this basis, the court held that only AS Norske Shell’s own costs could be included in the cost basis which should be allocated to the Shell-Group internationally. Thus, the assessment was based on an unmerited understanding of the General Tax Act Section 13-1 and the OECD Guidelines, and the assessment was set aside. The Court concluded that in a new assessment of AS Norske Shell, the costs which were charged to partners by the company as operator should not be included in the cost basis which should be allocated to the Group internationally.
AS Norske Shell was awarded legal costs in the Supreme Court.
Notably, the Supreme Court confirms in the award the relevance of the OECD Guidelines as part of the legal framework when applying the arms’ length principle, and that the courts may try the legal interpretation of the Guidelines which form the basis for assessments under the General Tax Act Section 13-1.