Petroleum tax reliefs – Advice from the Finance Committee to the Parliament

This spring, the Government suggested some temporary changes to the petroleum taxation in Norway. On 10 June 2020, the Finance Committee drafted a Letter of Advice to the Parliament. The document suggests some changes to the initial proposal. As the Parliament has not yet voted, the case is still not closed. But a majority of the Committee has agreed.

The proposed temporary tax reliefs are supposed to be evaluated within the first half of 2023.

In main lines, the proposed changes will

1) Advance cost deductions with respect to special petroleum tax (“special tax”, additional tax at 56%) and

2) Decrease the income subject to special tax.

Let´s have a look at the proposed changes applicable to 2020 and 2021:

1)    Before earning taxable income: Advanced tax deductions
Deductions will still be granted for the cost of investments in pipelines and production facilities, before the production starts. 

Such costs may currently be deducted from the “normal” corporate income (taxed at 22%) as well as the “special” petroleum related income (taxed additionally at 56%). But the companies must spread all the deductions over six years. The oil industry wanted to deduct all investment costs in the first year already. But the required period of six years remains, with respect to the normal income tax of 22%.

From the basis for the 56% special tax, however, the oil companies may deduct investments made in 2020 and 2021 up front. (Plus certain planned costs through 2023). The deductions will be granted for planned investments applied for by the end of 2022 and approved by the end of 2023.(So what? You may ask. The total deduction from the special tax will for 2020 and 2021 be granted already in the first year of investment. But the total tax remains the same. Well, there is a question of access to cash:)  

AND: Prepayment of «negative tax»
The tax value of any loss and unused uplift (cf below) arising in 2020 and 2021, may be paid in cash. Meaning an up front cash benefit at 13.44% of the applicable investments. The «negative tax» will be prepaid over six instalments and balanced upon the final assessment. This will make the oil companies more liquid through the exploration phase.​

2)    Upon success: Increased deduction from special tax (more NON-taxable special income, uplift) 

Today, oil companies may deduct 20.8% of the investment costs from the basis for special tax (i.e. the additional 56%, reducing the tax on this part from 78% to 22%). But the taxpaying companies must spread this «uplift» over 4 years.

The Government suggested an up front uplift. Totally deductible from the special tax base in year 1.

The Finance Committee agrees with the Government to remove the allowance period of 4 years. Meaning an immediate special tax relief for investment costs of 13,44% (56%*24%).

To compensate for the advance deductions (cf above), the Government proposed that the total uplift be decreased from 20.8% to 10% of the investment costs.

The Committee, on the on the opposite, suggests a larger part (24%) of the investments to become deductible from the special tax base.

As from 2020, 24% of the investment costs may then be deducted. I.e. the total uplift will increase from 20.8% of the investments to 24%.

Pre discounting, the increased uplift provides an increased tax relief related to uplift at 1.792 percentage points, compared to the current total of 11.648% (20.8%*56%). This is a more real tax relief than proposed by the Government, who actually suggested to reduce the total uplift from 20.8% to 10%.

The interim rules are now aiming at making oil investments more profitable (by way of increasing the “uplift”).

BUT: Lower deductions for finance costs
For successful oil companies paying special tax, the Finance Committee will reduce the current right to deduct 50% of the matching financing costs. Today, the dedcutible 50% will be calculated based on the ratio of tax values offshore vs. onshore. The proposed ratio will relate to the special tax base, leaving more deductions at only 22% (not 78%). This may increase our special tax revenues in the long run. On the other hand, the profitability of debt financed explorations may decline.

Lastly, the Committee advises the Parliament to require several reviews. The proposals concern health, security, employment and environment.