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 from production of petroleum resources, the oil companies are subject to an additional special tax. The ordinary company tax rate is 22 %. To ensure a neutral taxation system, paid company tax is written off when calculating the special tax base. This entails a special tax rate of 71,8 % in order to maintain a combined marginal tax rate of 78 %.
Total estimated tax payments from petroleum activities are about NOK 536,8 billion in 2022. Norway’s tax revenues from petroleum activities between 1971 and 2021 and an estimate for 2022 is shown below.
The net government cash flow from petroleum activities, 1971-2022
2022 are preliminary numbers from the Revised National Budget 2022. Paid taxes are adjusted for repayments, and the numbers are in constant 2022-prices.
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 the 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 in the company tax. Special tax value of losses is reimbursed at the tax settlement, the year after it accrued. Neutral properties in the tax system are 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 (ordinary tax), 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 continental shelf.
Cash-flow model in the special petroleum tax
As of the income year 2022, a cash-flow based tax was introduced in the special tax. This means that investments are deducted immediately in the special tax base. To ensure a completely neutral special tax, a deduction is also made for the calculated ordinary company tax in the special tax base. In order to maintain a combined marginal tax rate of 78 per cent, the special tax rate was technically increased from 56 to 71.8 per cent. Financing costs are not deductible in the special tax base.
Loss carry forward and reimbursement
Companies that do not have any taxable income may carry forward losses to subsequent years in the company tax. The special tax value of the deficit is reimbursed. These rules are intended to ensure that companies are treated equally for tax purposes regardless of whether or not a company is liable to pay tax.
Investment based deductions
When the basis for ordinary tax is calculated, investments are written off using straight-line depreciation over six years starting from the year the expense incurred. In the special tax base, investments are written off immediately in line with a cash-flow based taxation model.
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.
Calculation of petroleum tax:
|Ordinary corporate tax||Special tax|
|Operating income (norm prices for oil)||Operating income (norm prices for oil)|
|- Operating expenses||- Operating expenses|
|- Linear depreciation for investments (6 years)||- Depreciation for investments (100 %)|
|- Exploration expenses, R&D and decom.||- Exploration expenses, R&D and decom.|
|- Environmental taxes and area fees||- Environmental taxes and area fees|
|- Net financial costs||- Calculated ordinary tax|
|- (Loss carry forward)|
|= Corporation tax base (22 %)||= Special tax base (71,8 %)|
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 planned 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.