Tax | Resource rent tax on onshore wind power
The government has presented its proposal in Prop. 2 LS (2023—2024) of a resource rent tax on onshore wind power. The proposal is based on a cash flow model, but with the important difference that any deficit must be carried forward at a risk-free rate (as in aquaculture) instead of being disbursed from the state (as in petroleum and hydropower).
The proposed effective tax rate is 35 % (compared to 40 % in the consultation paper). The resource rent tax will cover wind farms subject to public licenses that consist of more than five turbines or have a total installed capacity of 1 MW or higher. The rules are proposed to be effective from the fiscal year 2024.
The Government’s proposal follows up on the consultation paper of 16 December 2022, but also involves important changes in line with input from the consultation round.
The Government proposes an effective resource rent tax rate of 35 %. In total, the proposal entails that wind power companies covered by the proposal will be subject to an effective tax rate of 57 % (including the corporate tax rate of 22 %). As with the other resource rent regimes, corporate tax is deductible in the resource rent tax basis. Thus, the formal resource rent tax rate is 44.9%.
Experience from the resource rent tax on aquaculture shows that the resource rent tax rate may be subject to negotiation. The government also proposed a 35 % effective tax rate for aquaculture, but the rate was reduced to 25 % after negotiations in the Parliament.
Treatment of deficits
Rather than an annual disbursement of the tax value of deficits—corresponding to the scheme that applies in the resource rent regimes for petroleum and hydropower—the Government maintains its position that deficits in the resource rent tax must be carried forward at a risk-free interest rate against revenues in subsequent years. In contrast to the rules for hydropower plants, it is currently proposed that there should be no possibility of coordination of deficits between different wind power plants or within a group (i.e., ring fencing). The Government justify these differences with a desire to check that the tax functions as intended before such schemes are introduced.
Upon cessation, the tax value of any uncovered deficits will be reimbursed from the state. Such payment shall be made after clean-up and repatriations of the wind power site has been completed.
Determination of revenue
When calculating the basis for the resource rent tax, revenues from power production shall be set to the spot market price (hourly rate). This is in line with the main rule that applies to hydropower plants.
Certain exceptions are made for power purchase agreements between independent parties concluded before 28 September 2022 (both physical delivery and financial hedging). An exemption is also proposed for long-term physical power purchase agreements (lasting at least three years) between independent parties during a transitional period (from 2024—2030). Finally, an exemption has been proposed for standard fixed-price agreements to end-users, in line with the rules that apply to hydropower. 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.
Deductions in the resource rent tax basis
The Government proposes that costs regularly connected to wind power production can be deducted directly in resource rent basis. The proposal is in line with the connection criterion in the hydropower tax regime and entails a stricter connection criterion than under the ordinary tax rules. Examples of deductible expenses include wages and other personnel costs, maintenance, insurance, administration and other production costs attributable to the power plant.
No deductions shall be made in the resource rent tax basis for costs incurred after feeding to the power grid, or other transmission costs in general. Nor shall any deductions be made in the resource rent tax basis for financial expenses, sales costs or other marketing expenses. Worth noting is that no deductions shall be granted for consideration related to private development agreements with municipalities and local communities that have previously been entered into to secure local support for wind power developments.
Deductions for investments, as well as transitional rules
The proposal for a cash-flow-based resource rent tax for onshore wind power entails that investment will be deducted immediately when costs are incurred (not when the asset is delivered/completed and through depreciation).
The Government proposes that no deductions should be granted for costs associated with the acquisition of existing wind power plants, but that the buyer — upon transfer of a whole wind power plant — enters into the seller’s tax positions.
For historical investments, the consultation paper proposed that the remaining tax value could be depreciated in ground rent income. The recent tax commission (NOU 2022:20) recommended transitional arrangements for historical investments where the remaining economic value of assets is deducted directly in the resource rent tax basis. Nevertheless, the Government maintains that the remaining tax values of historical investments shall be deducted from the resource rent tax through depreciations.
However, two improvements are being made. Firstly, the taxable value as of 1 January 2024 must be calculated based on the ordinary depreciation rules, even if the investments have been covered by the temporary depreciation rules (straight-line depreciation over five years). This means that historical investments to a somewhat greater extent will benefit from future depreciation in the ground rent regime.
Second, the Government proposes to provide a compensation, called a “waiting rate”, because the deductions occur through depreciations and not as direct deductions (as is the rule for depreciations generally). The proposal is based on the fact that immediate recognition of expenses will entail very modest revenues from the resource rent tax on wind power in the early years, and thus that the deduction should be distributed over time to ensure a certain ongoing revenue. The waiting rate shall be based on the risk-free rate on return.
Distribution of tax revenues
The Government proposes that host municipalities will receive 50 % of the proceeds from the resource rent tax. This is done by increasing the production tax from 2 to 2.3 øre per kWh and securing additional allocations in years with high resource rent. The production tax can be credited from the stipulated resource rent tax NOK for NOK and is therefore a tool for distribution of the resource rent proceeds. In return, the government scraps the proposal to introduce a natural resource tax.
The high-price contribution is discontinued
The Government also proposes to phase out the high-price contribution imposed on power producers in 2023 with effect from 1 October 2023.