Oil & Gas | Provisional tax changes to stimulate investments in the petroleum sector
From left: Hans Fredrik Grøvan (Krf), Siv Jensen (Frp), Jonas Gahr Støre (Ap), Trond Helleland (H), Marit Arnstad (Sp) og Terje Breivik (V)
The main elements of the proposal
The provisional consists of the following key elements to secure and stimulate investments on the Norwegian Continental Shelf:
- Investments in 2020 and 2021 are immediately tax deductible in the tax base for special tax (56% tax rate).
- Investments made in 2022 and later may also be immediately deducted in the tax base for the special tax if they are made pursuant to inter alia a Plan for Development (PDO) or a Plan for Installation and Operation (PIO) filed before 1 January 2023 and approved by the Government after 12 May 2020, but before 1 January 2024. However, this only comprise investments up to and including the year of planned “first oil” as defined in the approved PDO/PIO.
- The uplift (an extra deduction item in the special tax base) is increased to 24% for investments comprised by item 1 and 2 above.
- The tax value of losses incurred in 2020 and 2021 (in both the ordinary tax base and in the special tax base (including the uplift of 24%) will be refunded by the state through negative instalment tax.
Further details of the background, the contents and the effect of the proposal is included below.
The Norwegian State is the owner of all petroleum deposits on the Norwegian Continental Shelf. Exploration and development is carried out by licence groups pursuant to the Petroleum Act where net income is taxed with a marginal tax rate of 78% (consisting of 22% corporate tax and 56% special tax).
The purpose of the provisional petroleum tax rules is to maintain and secure continued investments and activity on the Norwegian Continental Shelf. Continued activity is especially important for the on- and offshore service industry in Norway, which has been under substantial pressure since the downturn in the oil price around 2014. The political compromise is a response to a bill presented by the Government, triggered by a call from a joint industry for immediate actions to maintain activity for producers and contractors in light of the fall in global oil prices and the SARS-CoV-2 outbreak. The Government’s proposal was presented on 12 May 2020 and is commented on in our previous newsletter.
The main changes from the Government’s proposal
The bill from the Government has been heavily debated. The cross-party compromise entails that the Government’s proposal will be passed by the political majority in Parliament with the following amendments:
- The uplift (an extra deduction item in the special tax base) is increased from 10% to 24%;
- The time frame for Plan for Development (PDO) or Plan for Installation and Operation (PIO) that are filed and approved by the Ministry of Petroleum and Energy is expanded with one year and includes all investments up to the planned year of “first oil” with no explicit stop date; and
- Companies in a non-tax paying position may claim refunded the expected the tax value of losses carried forward in advance of the tax assessment (“negative instalment tax”).
The compromise contains additionally several resolutions to be followed up by the Government as further detailed below.
The proposal was passed in Parliament on 12 June 2020 (first voting) and the act is assumed to be sanctioned next week.
The provisional rules will consist of the following key elements:
- Investments booked in 2020 and 2021 are immediately tax deductible in the tax base for special tax (56% tax rate). The said investments are capitalised and depreciated over 6 years in the ordinary tax base (22% tax rate) as today.
- Investments made pursuant to (A) a PDO/PIO filed before 1 January 2023 and (B) approved by the Government after 12 May 2020, but before 1 January 2024, are tax deductible in the tax base for special tax. The latter amendment does not comprise investments made after the year of planned “first oil” as defined in the approved PDO/PIO.
- The uplift (an extra deduction item in the special tax base) is increased from the current level of 20.8% (5.2% over four years) to 24% in the year of investment for investments comprised by item 1 and 2 above.
- The tax value of losses incurred in 2020 and 2021 (in both the ordinary tax base and in the special tax base (including the uplift of 24%) will be refunded in cash by the state. The refund may be refunded in advance of the tax assessment on a running basis through the instalment tax regime (i.e. three repayments made in the second half of the income year (1 August, 1 October and 1 December) and three repayments made in the first half of the following year (1 February, 1 April and 1 June)). The refund will be based on a preliminary estimate of the loss carried forward with a final settlement in Q4 following the income year. The refund claim against the State cannot be pledged.
- The Government may lay down supplementary provisions.
The compromise contains additionally several resolutions to be followed up by the Government.
- Plugging of wells should be prioritized when the OG21-programme is updated;
- Promote measures for zero emission from offshore vessels used on the NCS;
- The Government and the industry shall present a collective plan on the reduction of greenhouse emissions with 50% within 2030 (compared to 2005 level);
- Appointing a committee to present a report on how to promote green and renewable onshore and offshore investments in Norway;
- The licensees should require that contractors emphasise high HSE standards and the use of skilled labour and apprentices;
- Spin-off effects for the mainland Norway shall be evaluated in new development projects;
- Increased grants to the Petroleum Safety Authority and the Labour Inspection Authority;
- Establish a cooperation with the employers’ and employees’ organizations to increase the number of permanent staff, the number of apprentices and further development of expertise that also may be used in the renewable industry; and
- Present a bill securing a land terminal at Veidnes.
Comments to the new legislation
The temporary changes will significantly improve the attractiveness of investments on the Norwegian Continental Shelf and will make Norway more attractive as a place for new investments compared with other areas. It is always difficult to assess the impact, but even within the first few days from the compromise was announced, there has been several decisions to go forward with investments and projects that had been stopped due to the low oil price and the COVID-19 situation.
The original proposal presented by the industry had a positive revenue effect for the State. However, the increased tax burden would be more than off-set by the value represented by immediate deduction of investments. Hence, the proposal from the industry would have a positive effect on the companies NPV calculations of the potential projects at the same time as the tax revenue would increase.
However, both the Government and the Parliament have decided to shelter the tax base for corporate tax and only allow immediate investment deductions in the tax base for the special tax. As a result, and to maintain the value of the proposed changes, the uplift had to be increased to 24%. This represents a net cost to the Government, calculated to be around NOK 8 billion in present value terms.
It is very hard to understand that the politicians would accept such additional costs in order to protect the corporate tax base of the petroleum tax from temporary changes. The main argument used by the Government parties is that they fear that allowing immediate expensing of investment costs in the corporate tax base would give other business areas the incentive to ask for the same treatment of investment costs and thus potentially erode the corporate tax base in general. However, the corporate tax base within the petroleum tax system has always contained several special elements.
It is expected that the Government will pass regulations on how to document the tax value of expected loss carried forward for the income year 2020 and 2021. It may be challenging to calculate and document such figures in time for the repayment of negative instalment tax in the second half of 2020, but we assume the tax authorities will do their utmost to achieve this.