Among the proposals are measures that would:
- Reduce the “uplift” (a tax deduction against the special petroleum tax) with immediate effect
- Revise the depreciation schedule for “onshore” machinery, to 30% for the first year when the annual declining balance rate is 20%
In a report released prior to the announcement of the revised budget for 2013, the following tax measures were proposed by the government:
- Reduce the general corporate income tax rate from 28% to 27%
- Increase the special petroleum tax rate from 50% to 51%
The rate changes could be effective as of 2014, depending on the budget for 2014 (which is expected to be announced in October 2013 after the election).
Changes in uplift*
The government has proposed changes that would be effective immediately (i.e., as of 5 May 2013, which is the date of the government’s announcement) to the petroleum tax law, and that would reduce the “uplift” from 30% to 22%. Because the uplift is provided over a period of four years, beginning from the investment year, the new uplift rate would be reduced to 5.5% per year (compared with the current uplift rate of 7.5%).
*The uplift is a deduction against the special tax of 50% (now, proposed to be 51% as of 2014).
The new uplift rate would, as a starting point, be effective for all investments (capital expenditures) incurred as of 5 May 2013. The basis for calculating the uplift is unchanged, and would be the capital expenditure subject to depreciation under the six-year straight-line depreciation rule available under the petroleum tax law.
However, the proposal includes “grandfather rules” for certain development projects for which a field development plan (or an exception from a field development plan) was filed before 5 May 2013. Such projects could continue to use the 30% uplift for investments through the first year of production (or with respect to a ready-to-use test for other assets—e.g., pipelines). Otherwise the new uplift rate would apply for investments already used in production in petroleum fields, fields under development, and investments in new fields.
The Ministry of Finance previously and repeatedly indicated that the 30% uplift appeared to be something of “an over-compensation.” When evaluating the change to the uplift rules, keep in mind that the 30% uplift rate was not reduced when the uplift period was reduced from six years to four years as of 2005 (i.e., a yearly uplift of 7.5% instead of the former 5%). Also note that the uplift procedure has often been used as an “adjustment factor” when there have been changes made to the petroleum tax system.
Given this history, tax professionals in Norway were not surprised with the proposed adjustment to the uplift; however, what was somewhat surprising was that this change is being proposed without any public consultation process and, thus, without any official opportunity for industry comments. The petroleum industry could, of course, make its comments known to the Parliament, but given that the government currently holds the majority in Parliament, enactment of the proposed changes is viewed as almost a certainty.
The Ministry of Finance stated that the reasons behind the changes include factors such as investment-based deductions are favored; cost- consciousness may be “weakened;” and investment between onshore activities and petroleum extraction activities may be distorted.
Officials with the Ministry of Finance also have expressed beliefs that the petroleum tax regime will continue to be “investment friendly,” and that the petroleum tax system will not provide disincentives for new investments. However, it is the opinion of some tax professionals in Norway that with respect to relatively small and marginal fields (of which there are reported to be a large number), the proposed changes in the uplift may hit particularly hard, and may make such fields uneconomically feasible under a company’s internal rates of return.
Tax rate, onshore depreciation rate changes
In a separate report to the Parliament, the government proposed that the general corporate income tax rate be reduced from 28% to 27% effective in 2014, and that the special (petroleum) tax rate then would be increased from 50% to 51%. With these changes, the marginal tax rate would remain at 78% for companies subject to the special petroleum tax.
The tax rate changes also would mean that the tax value of the uplift would be marginally increased, but the tax value of interest deduction would—for most companies—be marginally reduced, assuming that most interest costs are allocated to a taxpayer’s onshore tax regime.
In addition, the government has proposed that the depreciation rate for items in the machinery group with 20% annual declining balance (group d) would be increased to 30% for the first year of depreciation. This provision would have limited implications for most companies that are subject to the special petroleum tax because all offshore assets depreciation follows a six-year straight line depreciation schedule.
The government also announced what is viewed as a “very marginal” increase in the SkatteFUNN (R&D incentive scheme) in order to stimulate research and development projects.
Finally, the Ministry of Finance appointed an “expert group” to review the corporate tax system, and a report is due in October 2014.
The tax rate changes (as proposed) would not be effective until this fall (as a part of the 2014 budget and after the election); thus, the tax rate change proposals are viewed as somewhat more uncertain. A new government (which some believe could be a possibility before the 2014 budget is presented) could, of course, have different views.
For more information, contact a tax professional with the KPMG member firm in Norway:
Jan Samuelsen, Tax Partner
+47 4063 9395
Per Daniel Nyberg, Tax Manager
+47 4063 9265