In the Revised National Budget 2013 the Government proposes a bill to reduce the uplift to 5.5 per cent for new investments with effect as of 5 May 2013. The uplift is an additional deduction in the tax base for special petroleum tax. It is calculated as 7.5 per cent of the investment cost for four years from the year the investment was incurred. The overall uplift is thereby reduced from 30 per cent to 22 per cent.
The Government proposes a transition rule for investment projects where the Ministry of Petroleum and Energy has received a plan for development and operation (PDO) or a plan for installation and operation (PIO) prior to 5 May 2013. The transition rule also applies to investments where application for exemption or written notification of any significant deviation from PDO or PIO is received by the Ministry of Petroleum and Energy prior to 5 May 2013. The transition rule only applies to investments incurred up to the same year as production starts or operation of the facility starts. For investments covered by the transition rule the current uplift of 7.5 per cent will apply.
The Government will facilitate the landing of oil and gas in Finnmark and North Troms. To achieve this, the Government will establish support measures within the rules for national regional aid within the EEA. Support measures will be notified to ESA.
The change in the uplift implies that oil companies will cover a larger share of their investment costs. Consequently, a larger share of the risk of cost overruns will also be carried by the companies. This will give rise to more cost awareness. The petroleum tax system will still be investment friendly.
The Government proposes that the ordinary business tax is reduced from 28 per cent to 27 per cent from 2014. At the same time the special tax is increased from 50 to 51 per cent. Hence, the total marginal tax rate in the petroleum sector is kept constant at 78 per cent.
The tax increase of the proposal is estimated to 70 billion NOK measured as a net present value over the period 2013-2050. This is equivalent to an annuity of approximately 3 billion 2013-NOK. The effect on tax revenue will be moderate over the first years.
The petroleum tax is part of the cash flow that is transferred to the State Pension Fund Global.
A more detailed overview of the petroleum tax system is in the annex of this press release.
Annex: The current petroleum tax system
In brief, the petroleum tax system can be described as follows:
Sales income (valued at norm prices)
- Operating costs (inclusive of exploration costs and indirect taxes)
- Depreciation (16 2/3 pct. For 6 years)
- Interest costs
- Losses carried forward from previous years
= Ordinary tax base taxed at 28 pct.
- Uplift (including unused uplift carried forward from previous years)
= Special tax base taxed at 50 pct.
- Tax rates. The taxation of petroleum activities is based on the rules governing ordinary business taxation. There is considerable excess return (resource rent) associated with the extraction of oil and gas. Therefore a special tax of 50 pct. on income from petroleum extraction has been introduced, in addition to the ordinary income tax of 28 pct. Consequently, the marginal tax rate on the excess return within the petroleum sector is 78 pct. The Government proposes that the ordinary business tax is reduced from 28 per cent to 27 per cent from 2014. At the same time the special tax is increased from 50 to 51 per cent. The total marginal tax rate in the petroleum sector is therefore still 78 per cent.
- Norm prices. The petroleum industry is characterised by extensive integration between purchasers and sellers. Therefore a system of administratively determined petroleum prices, norm prices, has been introduced for tax purposes. This system covers petroleum produced on the Norwegian continental shelf. The norm price shall correspond to the price at which petroleum could have been traded between independent parties in an open market.
- Depreciation rules. Expenses incurred in the acquisition of production facilities and pipelines may be subjected to linear depreciation schedule over 6 years (up to 16 2/3 pct. annually) as from the year during which the investment is made.
- Uplift. The purpose of the uplift is to contribute to ensuring that normal returns are not subjected to special tax. As from 2005, the uplift represents 7.5 pct. of the cost price of depreciable operating assets, and such a deduction from the special tax base is granted annually for four years as from the year in which the investment is made (a total of 30 pct.). If the tax base is negative, any excess uplift may be carried forward. In the Revised budget for 2013 the Government proposes to reduce the uplift in the petroleum tax system from 7.5 per cent to 5.5 per cent. The uplift will then amount to 22 per cent nominally over 4 years.
- Interest on debt. As from 2007, a new rule for the calculation of deductible financial costs was introduced. The rule implies that net financial costs incurred on interest-bearing debt are deductible. The deductible net financial costs shall be comprised of the sum of interest costs and foreign exchange losses, less foreign exchange gains, pertaining to such debts. The deductions shall equal such proportion of the net financial costs of the company as corresponds to 50 per cent of the ratio between the value of assets attributed to the shelf district (net of tax depreciation as per 31 December of the tax year) and the average interest-bearing debt over the tax year. Other financial income and expenses shall be attributed to the onshore district.
- Loss carry forward. To ensure that new companies receive the same tax treatment as the established ones, special rules have been introduced concerning loss carry forward with interest and payment of the tax value of losses. As from 2002, loss may be carried forward with interest. As from 2005, the central government will make annual payment of the tax value of losses associated with the exploration activities of companies recording a loss for tax purposes. The central government will also make payment of the tax value of losses upon the termination of activities on the Norwegian shelf.