The state budget 2016 does not include any particular tax incentives for the petroleum industry, and maintains the marginal tax rate of 78%. The “special” petroleum tax increases to 53% (up 2%) which corresponds to a reduction in the general corporate income tax rate. The proposed amendments to the tax legislation and the budget must be approved by the Parliament in December 2015.
Exploration and production (E&P) companies with activities on the Norwegian continental shelf (NCS) and involved in pipeline transportation of petroleum are taxed according to special rules that include a special petroleum tax rate of 51% in addition to the general corporate tax rate of 27%. The budget 2016 proposes to reduce the corporate income tax rate to 25% (down 2%) with a corresponding increase of the “special” petroleum tax rate to 53%. Hence, the marginal tax rate of 78% would continue to apply for “E&P companies.”
Because the tax basis for the special petroleum tax is slimmer compared to the tax basis for general corporate tax, a 2% increase of the special petroleum tax entails a net revenue loss for the government of approximately MNOK 630 for fiscal year 2016. There are no suggestions in the 2016 budget to amend the” uplift rules” for capitalized development costs, which today is at 22% (5.5% per year over four years). Hence, the net value of the uplift is slightly increased for E&P companies with activities on the NCS. On the contrary, the tax value of deductions for interest and finance cost under the general corporate tax rate is slightly reduced for most companies.
The government has suggested a marginal adjustment of the CO2 tax for the petroleum industry in addition to a marginal adjustment of the NOx tax. Most of E&P companies on the NCS are members of the “NOx fund” and accordingly, the adjustment in the NOx duty will not have an effect on these companies.
As of 2014, Norway introduced rules to limit the tax deductibility of interest cost between related parties. While these rules are essentially an anti-avoidance measure, they apply regardless of the business rationale behind the finance arrangement. The government has proposed reducing the threshold for interest deduction from internal loans from 30% EBITDA (earnings before interest, taxes, depreciation, and amortization) to 25%.
Nevertheless, the rules on interest cost limitations do not apply to E&P companies. In the budget for 2014, the government announced that it would suggest similar rules also for E&P companies. However, there are no details in the budget 2016 that suggest similar rules for the petroleum industry.
In addition to the budget 2016, the governments also presented a separate “white paper” proposing tax reform. The Ministry of Finance proposes that the general corporate tax rate would be reduced to 22% by the end of 2018, but has concluded that the tax revenue from the E&P sector would be kept at the same level in order to maintain the current level of revenue for the government. The Ministry of Finance may suggest increasing the special petroleum tax and/or making amendments to the current uplift rules.
The petroleum tax law has special rules for depreciation of installation and pipelines on the NCS. Such assets may be depreciated at a rate of 16 ⅔% annually from the year when the investments are made. Depreciation over six years from the year of investment will often imply substantial tax benefits. The Ministry of Finance discussed the depreciation of offshore assets but concluded that no proposals would be made to amend the depreciation rules, at least for the time being and not without a thorough review of all relevant elements of petroleum taxation.
Other than the information described above, the white paper for tax reform does not include any particular discussions, proposals or incentives regarding the petroleum tax system. However, some of the proposed changes to the general tax system could affect petroleum taxation, such as a change in the tax rates, potential increased use of withholding taxes, interest limitation rules, among other items.
For more information, contact a tax professional with the KPMG member firm in Norway:
Per Daniel Nyberg | Per.email@example.com
Jan Samuelsen | Jan.firstname.lastname@example.org
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.