The petroleum taxation system is based on the rules for ordinary company taxation and are set out in the Petroleum Taxation Act (Act of 13 June 1975 No. 35 relating to the taxation of subsea petroleum deposits, etc). Because of the extraordinary returns on production of petroleum resources, the oil companies are subject to an additional special tax. The ordinary company tax rate is 22 %, and the special tax rate is 56 %. This gives a marginal tax rate of 78 %.
Total estimated tax payments from petroleum activities are about NOK 23 billion in 2020 and NOK 8 billion in 2021 (2021-NOK). Norway’s tax revenues from petroleum activities between 1971 and 2020 is shown below.
The net government cash flow from petroleum activities, 1971-2021
2020 and 2021 are preliminary numbers from the National Budget 2021. Paid taxes are adjusted for repayments and numbers are inflated using CPI Norway.
Source: Ministry of Finance, Statistics Norway
Neutral tax system
The petroleum taxation system is intended to be neutral, so that an investment project that is profitable for an investor before tax is also profitable after tax. This ensures substantial revenues for Norwegian society and at the same time encourages companies to carry out all profitable projects.
To ensure a neutral tax system, only the company's net profit is taxable, and losses may be carried forward with interests. Neutral properties in the tax system is also important when defining investment based tax deductions.
In general, only the company's net profit is taxable. Exemptions, such as royalties, are no longer a part of the tax system. Deductions are allowed for all relevant costs, including costs associated with exploration, research and development, financing, operations and decommissioning.
Consolidation between fields is allowed. This means that losses from one field, or exploration costs, can be written off against the company's income from operations elsewhere on the Norwegian shelf.
Loss carry forward
Companies that do not have any taxable income may carry forward losses and uplift to subsequent years, with interest. These rights follow the ownership interest and may be transferred. Companies may also apply for a refund of the tax value of exploration costs in connection with the tax assessment. These rules are intended to ensure that exploration costs are treated in the same way for tax purposes regardless of whether or not a company is liable to pay tax.
The reimbursement system was introduced in 2005 to reduce the entry barriers for new actors and encourage economically viable exploration activity.
Under this system, companies that are making a loss may choose between requesting an immediate refund of the tax value of exploration costs from the taxation authorities and carrying forward the losses to a later year when the company has a taxable income. If a company chooses the immediate payment option, the exploration costs cannot be deducted from income in later tax assessments.
This system ensures that the value of the tax deduction is the same whether or not a company is liable to pay tax, and that all companies are treated equally.
It takes a long time from a discovery is made until it is developed and put in production. 10-15 years is not uncommon. Carrying forward losses all these years is financially challenging for the companies. The reimbursement system is therefore important for companies that are not yet liable to pay tax.
Investment based deductions
When the basis for ordinary tax and special tax is calculated, investments are written off using straight-line depreciation over six years from the year the expense was incurred.
To shield normal returns from the special tax, an extra deduction is allowed in the special tax base, called uplift. In 2016 the total uplift was 22 % (5.5 % per year for four years starting with the investment year). As the ordinary tax and special tax rate has been adjusted in recent years, the uplift has been adjusted accordingly to ensure unchanged overall tax burden. The uplift is 20,8 % of the investments (5,2 % per year).
In many instances, petroleum produced by companies operating on the Norwegian continental shelf is sold to affiliated companies. It is important for the Norwegian government revenues that oil and gas sold from Norway is taxed on the basis of market prices. To assess whether the prices agreed by affiliated companies are comparable to those that would have been agreed by two independent parties, the authorities can set norm prices that must be used when calculating taxable income for the tax assessment.
The Petroleum Price Council is responsible for setting norm prices, which it does after collecting information from the companies and holding meetings with them. The norm price system applies to various types and qualities of petroleum. For gas, the actual sales prices are used.
In the first half of 2020 the global oil demand fell dramatically because of the Covid-19 pandemic. The pandemic, combined with low oil and gas prices, resulted in temporary financial difficulties and increased uncertainty. Without temporary tax changes, the investment activity on the Norwegian continental shelf could have been lower than expected as a consequence of postponed of planned and profitable projects. This could have led to problems for the service and supply industry.
In June 2020, the Norwegian parliament enacted temporary changes in the petroleum tax act to help oil and gas companies execute planned investments. The decision changes rules for depreciation and uplift, as well as the treatment of tax losses, for a limited period of time:
- Full depreciation, plus 24 per cent uplift, in the investment year, in the special tax base. Applies to all investments in 2020 and 2021, and investments until start of production under development plans delivered to the authorities before 1 Jan 2023 and approved before 1 jan 2024.
- Companies with tax losses in 2020 and 2021 can get the losses refunded.