Executive summary

On 31 August 2021, the Norwegian Government announced proposals for changes in Norway's petroleum taxation from 2022. The consultation documents regarding the proposed changes were released on 3 September. The main features are:

• Investment costs (Section 3b fixed assets) are expensed immediately in the special tax base. This immediate expense replaces the current depreciation and uplift deductions which will be discontinued. The change only applies to new investments from 2022, and not to investments covered by the temporary rules introduced in 2020. For background, see EY Global Tax Alert, Norway's Government proposes temporary tax stimulus measures for oil and gas companies, dated 11 June 2020.
• The tax value of new tax losses in the special tax base (71.8%) will be refunded in connection with the tax assessment the following year.
• As a transition to the new rules, the tax value of the tax losses and unused uplift from previous years will be paid out, both in the special tax base and corporation tax base.
• Calculated (ordinary) corporate tax is deductible against the special tax base, and the special tax rate is therefore technically increased from 56% to 71.8%. The remaining 6.2% tax deduction will be carried forward with no interest for companies that are not in a tax paying position.
• Exploration tax refund and cessation tax refund will be removed, and ordinary offshore corporation tax losses will be carried forward without interest.

Detailed discussion

Overview

The Norwegian Government is proposing to restructure the special tax as a cash-flow tax with immediate expensing of new investments. The proposal only applies to investments made from 2022 under the ordinary rules. With immediate deduction of the full investment cost and no depreciation and uplift, the special tax will be neutral, meaning that an investment that is profitable before the special tax will be profitable after the special tax. The six-year straight line depreciation in the ordinary offshore tax regime (22%) will be continued.

The temporary rules which were introduced in 2020 will not be impacted but will be phased out gradually in line with the rules introduced last year.

Special tax and ordinary tax

Oil and gas companies operating within the Norwegian jurisdiction are subject to a general corporate tax of 22% and a special tax of 56%. The ordinary corporation tax will be deductible in the basis for the special tax and to maintain a marginal tax rate of 78%, the special tax rate is therefore technically increased to 71.8%.

Tax losses

The tax value of annual losses in the special tax basis (71.8%) will be refunded as part of the annual assessment around November of the following year (as for the current exploration tax refund). This will strengthen the liquidity of companies without taxable income which would otherwise have to carry forward any losses with interest (if not included in the exploration refund). The Ministry of Finance will consider proposing a system for pledging loss refunds, as currently found in the exploration tax refund scheme. This would mean a new market for third-party financing of development expenditures, similar to current third-party exploration financing.

Any losses in the ordinary corporation tax base (22%) must now be carried forward without interest. As a transition to new rules, the tax value of the tax losses and unused uplift from previous years will be paid out, both in the special tax base and corporation tax base.

Abandonment cost

There will be no special arrangements for abandonment cost. This means that though these will now be immediately refundable against the new (technical) special tax rate of 71.8%, the remaining 6.2% deduction will be difficult to achieve for companies outside a tax paying position.

Interest limitation rules

Deduction of financing costs against the special tax base will be based on the existing allocation formula, meaning that interest deductions against the special tax base will be effectively phased out as old investments and tax balances are fully depreciated. In the proposal it is also stated that the Ministry of Finance is (still) assessing the application of the interest limitation rules in the ordinary tax basis for petroleum companies.

Feedback on proposal

The Ministry of Finance has requested feedback on the proposal by 3 December 2021. The Ministry anticipates that the final proposal can be submitted for approval in the Parliament in the spring of 2022.

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For additional questions with respect to this Alert, please contact the following:

EY Norway, Oil & Gas, Stavanger

• Eivind Galta | eivind.galta@no.ey.com
• Ole Stanghelle | ole.stanghelle@no.ey.com