Tax | The Norwegian Government’s Proposed Resource Rent Tax on Aquaculture
In this newsletter, we summarize the main features of the proposal. A version of the newsletter in Norwegian can be found here.
1. Tax rate
The effective special tax rate has been proposed at 35% (compared to 40% which was the proposal in the consultation paper presented in 2022). If this is adopted, the effective marginal tax rate (including the corporate income tax of 22%) will be 57%. As the corporate income tax will be deductible in the special tax, the formal tax rate for the special tax will be 44.9 %.
2. Scope of the resource rent tax
The special tax is a tax on returns from ordinary commercial aquaculture licenses in the sea for the production of salmon, trout and rainbow trout. Aquaculture licenses pertaining to offshore aquaculture and for special purposes such as development licenses and research licenses is not covered by the proposed scope. Aquaculture on land is also excluded.
3. Cash flow taxation
The special tax is designed as a cash flow tax, where revenues and investments are taxed on an ongoing basis in the year in which they are earned/incurred. Hence, investments can be deducted immediately instead of being capitalized and subject to depreciation. This is a similar system as has already been introduced for the petroleum sector and for hydroelectric power plants in Norway.
4. The calculation of income from the sale of salmon, trout and rainbow trout
Gross income from the sale of salmon, trout and rainbow trout shall be based on fixed prices (norm prices) determined by an independent price board. For tax purposes, the price board will set the market price of the fish at the time when the fish is removed from the pen. The original (and heavily criticized) proposal of setting norm prices based on the Nasdaq index has -not surprisingly) – been abandoned in the current proposition.
The aim is for the price board to determine the prices from 2024 and onwards. In 2023, and in subsequent years to the extent the price board has not set a norm price, the taxpayers must determine the market price at the point of extraction themselves.
However, subject to certain conditions, the Government will accept pricing based on long-term fixed-price contracts for determining the gross income.
The gross income subject to special tax will be calculated by multiplying the market value of the fish on the point of extraction from the pen by the slaughtered volume.
5. Deductions in the resource rent tax
The operating expenses related to the sea production phase can be deducted directly in the special tax. This applies for expenses such as the purchase of smolt, feed, lice- and disease treatments, etc. Costs attributable to activities after the point of extraction cannot be deducted in the special tax, thus excluding costs related to the transport, slaughter, processing, marketing and the like.
Moreover, the value of aquaculture licenses cannot be deducted; however, a template deduction in revenue will be permitted for licenses purchased at auction in 2018/2020 and allocated at fixed prices in 2020.
5.1 Investments in business assets (and transitional rules)
The Government proposes immediate deductions in the special tax basis for investments in business assets at the time the cost is incurred. Hence, the taxpayer will not need to wait until the asset has been delivered/completed (as originally proposed in the consultation document).
However, the right to immediate investment deductions (cash-flow taxation) only applies to assets that are exclusively used in the sea phase (e.g. investments in physical installations such as cages, floating modules, feed installations, etc.).
Investments in business assets that are only partly used in the sea phase may only be deducted in the special tax in accordance with the general depreciation rules. If the company uses the business asset partly for its own sea phase activities and partly to produce for sale externally, the depreciation in the resource rent tax must be limited accordingly.
The suggested transitional rules only allow for the remaining tax values of historical investments (before the introduction of the special tax) to be deducted in the special tax through depreciation (with no immediate deduction) of the remaining tax values. Moreover, there is no deduction for the value of the biomass in the sea as per 31 December 2022. This is perceived as particularly unbalanced by the fish farming companies – as the revenue from the same biomass will be subject to resource rent taxation.
6. Treatment of tax losses
Instead of annual reimbursements of the tax value of losses, as seen in the abovementioned tax regimes for the petroleum sector and hydropower sector, the Government proposes a duty to carry the tax losses forward (subject to risk-free interest) for use against any profits in later tax years. This will not be perceived as neutral by the companies making the relevant investments.
The tax value of carry-forward losses will be reimbursed upon the cessation of the aquaculture business subject to the special tax. The Ministry of Finance has stated that it will look further into how this claim against the Government can be used a security for the taxpayer’s financing.
7. Tax free allowance
The Government has proposed a standard tax free allowance set at NOK 70 million at group level (where groups owned by the same or related individuals are also identified). The principle of such deduction has been criticized as it is politically motivated and could potentially cause structural/corporate adaptations and result in differing ability and willingness to bid on biomass capacity in auction rounds based on the size of the company. These are not consequences one would expect from a neutral tax regime.
8. Next steps
The proposal has now been sent to the Parliament, where it will be subject to the review of the Parliament’s Financial Committee. The Government has emphasized its desire for a wide consensus in the Parliament, and the industry is hopeful that substantial amendments to the current proposal will be made. The Committee has arranged a public hearing of the proposal on 17 April 2023 and is expected to present its recommended resolution to the Parliament by 16 May 2023. The proposal es expected to be adopted by the Parliament before the summer of this year, most likely in June 2023.