A political agreement on future tax amendments has been reached, and among the agreed measures are proposals for a reduction to the rate of corporate income tax to 23% by 2018 and changes to the earnings stripping rules.
Preliminary discussions on tax reform were finalised in Norway’s Parliament in early May 2016 when an agreement among six of the political parties was reached. The parties agreed to 17 “action points” for the direction of the future tax changes, with the tax agreement generally following recommendations of the Scheel-Committee report (December 2014).
Among the proposals in the agreement are measures for:
The agreement is a result of extended political bargaining, and in line with the tradition of cross-party consensus on tax reform. Tax professionals, therefore, expect that future work on tax reform proposals would follow or be in line with the agreement, and that any changes would be stable regardless of whether there is a change of government after the general election in 2017. More detailed information on the development of the tax reform is expected once the Committee for Financial Affairs issues its review of the tax reform later this year.
The ordinary corporate income tax would be reduced to 23% by 2018. Further rate reductions would be assessed in light of international developments, and in particular developments in the Nordic countries. A reduction in the ordinary corporate tax rate would most likely entail a corresponding increase in the rate of the petroleum tax.
The political parties proposed to broaden the scope of the earnings stripping rules. Under current rules, the deductibility of interest on related-party loans is limited to 25% of tax EBITDA (earnings before interest, taxes, depreciation, and amortization). In the agreement, the political parties agreed to make these rules applicable to interest on third-party loans. The agreement specifies that any amendments would be designed in a way so that they would not affect ordinary commercial lending conditions.
A change in the earnings stripping rules in line with the agreement would mean that there would be a fundamental change in financial structuring of capital intensive businesses and, in particular, on leveraged acquisitions. In particular, the effective taxation of real estate investments would likely materially increase. Furthermore, a tightening of these rules could also lead to a significant risk of economic double taxation. This could blur the delineation between equity and loan financing, but without the benefit of exempting interest income from tax in the way dividends currently are.
With the potential introduction of interest withholding tax, (a public hearing is advertised by the Ministry of Finance during 2016), a number of businesses would need to reconsider their financing arrangements. It remains to be seen whether a tightening of the earnings stripping rules would be introduced without a proper public hearing.
Earlier this year, a proposal for establishing a general anti-avoidance standard by law was sent for public consultation. The political parties agreed to assess whether the proposed anti-avoidance standard also would need to include a requirement for the taxpayer to disclose the purpose of transactions.
The parties agree to implement the proposed actions recommended by the OECD in the BEPS project. Furthermore, the government has been asked to assess how the Norwegian tax regime would be affected by complex financial instruments and corporate structures in light of aggressive tax planning by multinational enterprises. This part of the agreement, while being framed as a political intention, means that the political parties support the Norwegian Ministry of Finance in its efforts to implement the BEPS initiatives in Norwegian law.
The Norwegian proposal on country-by-country reporting generally is in line with the final recommendations under BEPS Action 13 issued in October 2015 (relating to transfer pricing documentation and country-by-country reporting). The government will assess the effects of the reporting and information disclosed by reporting entities. In addition, the government has been asked to consider establishing a supervising body for the reporting entities.
In previous communication from the Ministry of Finance, there was a question as to whether the financial sector would be subject to value added tax (VAT) and / or subject to a tax on marginal income in the financial sector. Under the current political agreement, a tax on financial services would be introduced, effective from 2017. The design and details of the tax rules are not expected to be presented until the announcement of the budget for 2017 (in October 2016). However, a position expressed in the agreement is that a tax on financial services would need to be a tax on the value added in financial services, and would be assessed in light of the fact that the financial sector is exempt from VAT.
The political parties broadly agreed that the combined corporate income tax and tax on dividends would be maintained at current levels. The suggestion of a reduced corporate income tax rate would entail a corresponding increase in the taxation of dividends. However, it has been requested that the government propose how to shield the return on investments from tax—that is, reflecting a risk-free rate of interest. An increase to the “tax shield” is proposed, and this would imply a reduction in taxable dividends.
The basis for wealth tax on working capital, in the form of shares or business assets, would be reduced by 20%. In addition, the Parliament has requested that the government assess the liquidity constraints related to wealth tax for business owners when the business faces deficits and limited possibilities for dividend distributions. Further, the government has been asked to consider the possibilities of introducing a time-limited discount in the wealth tax for entrepreneurs in connection with initial public offerings (IPOs). The result of this work will be presented in connection with the budget for 2017 (in October 2016). Finally, a previously suggested increase in the wealth tax for forestry would not be implemented.
The political parties’ agreement suggested the appointment of an “expert committee” to weigh additional limitations on client confidentiality for tax advisors, including advocates. Specifically, there would be considerations as to whether the duty to disclose information would also include corporate structures and the motive behind financial transactions. Also, the committee would evaluate whether tax advisors involved in tax planning must be required to provide information of the tax planning to the tax authorities. The proposal is contrary to previous public research work (NOU 2015:3) that found the duty of confidentiality to be a fundamental condition in order for lawyers to have the role intended for in a state governed by law.
A Norwegian public company registrar would facilitate transparency related to beneficial ownership in Norwegian companies, and it was agreed that a system would be established in line with Financial Action Task Force's standards (FATF) and EU 4th anti-money laundering directive.
For more information, contact a tax professional with the KPMG member firm in Norway:
Per Daniel Nyberg | +47 40639265 | firstname.lastname@example.org
Thor Leegaard | +47 40639183| email@example.com
Marius Aanstad | +47 40639551| 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.