New petroleum tax proposal on hearing
The Ministers of Finance and of Petroleum and Energy announced on a press conference 31 August 2021 that a proposal for new petroleum tax legislation will be sent on hearing to the industry and other interested parties.
The main features of the proposal are:
- Investments in field facilities, production wells and pipelines can be expensed when incurred for Special Petroleum Tax (SPT) purposes. Such expensing will replace the current 6 year depreciation schedule and 20.8% uplift. Interest costs will not be deductible for SPT purposes.
- The special tax rules enacted in June 2021 will not be affected and will continue to apply for eligible investments and projects.
- The tax value of new SPT tax losses will be refunded in cash from the state annually. A possibility to pledge refund claims to lenders will be evaluated. The existing exploration and exit loss refund schemes will thus no longer be necessary for SPT purposes.
- The tax value of existing tax losses and unused uplift will be refunded in cash both for SPT and ordinary income tax purposes.
- The special petroleum tax rules applying to tax losses (interest compensation and exploration/exit cash refund schemes) will be repealed for ordinary income tax purposes. Other adjustments to align ordinary income tax on E&P activities with other businesses will be considered. It is not stated whether this will include depreciation schedules for income tax purposes.
- The total tax rate will remain at 78%. Ordinary income tax will be deductible in the SPT basis. The SPT tax rate will be increased from 56% to 71.8% as a result of this.
- The new tax rules will be proposed to take effect from the income year 2022.
The above main points are the only features announced at this time. A full hearing proposal is expected within a week. We will analyse the proposal in more detail and revert with additional comments once received.
The stated intention of the new proposed rules is to create a cash flow based SPT, which will be neutral on investment decisions from a tax economics perspective. Immediate expensing and annual SPT loss refund will improve liquidity for companies investing in new projects. Over time the nominal taxes will increase compared to the current system. The discount rate used for calculating NPV effects is important for evaluating the overall result for the industry. The Ministry of Finance and the industry has long disagreed on the correct rate to be used for such purpose. Direct expensing will end this discussion according to the Ministry.
Companies in a pure exploration position will not receive any cash refund for ordinary income tax exceeding the effect of SPT deduction and related SPT loss refund.
A possibility to pledge SPT loss refund claims will mitigate the loss of the current exploration tax loss refund scheme and may provide additional security for financing of development investments.
The hearing proposal and the industry's response will be a matter to be dealt with by the government resulting from the upcoming general election on 13 September 2021. Any final legislation will also be proposed by such government and finally enacted by the newly elected parliament (Storting). Such enactment may not occur until the spring session of 2022. It may be argued that this timeline is too ambitious given the significant system changes proposed.