Petroleum Tax Regulations
The taxation of petroleum resources on the Norwegian continental shelf is governed by a special law concerning petroleum taxation (the Petroleum Taxation Act). The Act applies to extraction and pipeline activities on the Norwegian continental shelf.
Unless determined otherwise in this special Act, general tax legislation applies.
In addition to the Petroleum Taxation Act, several regulations have been passed regarding the companies’ accounting and fiscal management of income and expenses that fall under the scope of the Petroleum Taxation Act.
The administrative rules governing petroleum taxation can be found in the Tax Administration Act.
Cash flow tax from the 2022 income year
From and including the 2022 income year, a cash flow tax has been introduced in the special tax. This means that immediate deductions are granted for offshore investments in the special tax. To ensure the neutrality of the special tax, a deduction is granted for a calculated company tax in the special tax basis. The tax rate in the calculation is set to the rate for ordinary income, which is now 22 percent. This implies a technical upwards adjustment of the special tax rate from 56 percent to 71.8 percent to maintain an overall tax rate of 78 percent.
Roughly speaking, the petroleum tax is calculated as follows with regards to new investments:
| Tax on general offshore income |
| Sales revenue (norm price for oil) - Operating expenses (including exploration costs) - Depreciation (on a straight-line basis over 6/3 years) - Interest deduction - (Loss carried forward) |
| = Basis for general income (22 percent) |
| Special tax |
|
Sales revenue (norm price for oil) |
| = Special tax basis (71.8 percent) |
Special rules in the Petroleum Taxation Act
The companies often sell extracted petroleum to associated companies. It would be a very difficult task for the tax authorities to assess whether or not the price agreed for each individual sale is reflecting the market price. To avoid this problem, the act provides a legal basis to determine norm prices as replacement for the actual sales income in the tax assessment.
The norm price is set by the Petroleum Price Board and is supposed to correspond to the price the petroleum would have obtained had it been sold between unrelated parties. Up until now, crude oil has been the product for which norm prices primarily have been set. The use of norm prices results in the actual sales revenues being tax free for the part of the price that exceeds the norm price, while a lower sales income means the company will be taxed for income it has not had.
With the implementation of the cash flow tax, the expenses relating to the acquisition of production installations are deducted in full in the special tax basis in the income year in which the expenses occurred. The cash flow tax, therefore, covers only the special tax basis and only fixed assets set out in section 3, letter b, see section 5, subsection 3, of the Petroleum Taxation Act.
In the basis for the general income, these fixed assets can be depreciated with up to 16 2/3 percent annually (33 1/3 percent in the case of Snøhvit/Melkøya) from and including the income year in which the expenses occurred, in other words, on a straight-line basis over a period of six and three years, respectively.
Fixed assets not covered by section 3, letter b, of the Petroleum Taxation Act are depreciated according to the general rules of the Taxation Act, both with regards to the special tax basis and the basis for the general income.
In June 2020, the Norwegian Parliament (Stortinget) decided on temporary rules set out in section 11 of the Petroleum Taxation Act. The background for the temporary rules was the coronavirus outbreak that year. For the 2020 and 2021 income years, section 3, letter b, of the Petroleum Taxation Act provided the option to immediately recognise expenses for the acquisition of fixed assets in the special tax basis with an additional uplift.
The rules have an effect for future income years by applying to expenses relating to acquisitions that are covered by a plan for development and operation (PDO) or a plan for installation and operation (PIO) received by the Ministry of Energy before 1 January 2023 and approved by the ministry before 1 January 2024. The plan must be approved by the Ministry of Energy after 12 May 2020.
The taxable depreciations under the temporary rules in section 11 of the Petroleum Taxation Act correspond to the depreciations after the implementation of cash flow tax: Expenses for acquisitions are deducted directly in the special tax basis. In the basis for the general income, these expenses relating to acquisitions can be depreciated with up to 16 2/3 percent annually (33 1/3 percent in the case of Snøhvit/Melkøya), in other words, on a straight-line basis over a period of six and three years, respectively.
Fixed assets that are acquired in 2021 or earlier, and that are not covered by the temporary rules in section 11 of the Petroleum Taxation Act, must be depreciated both in the special tax basis and in the general income pursuant to the rule in section 3, letter b, of the Petroleum Taxation Act from and including the income year the expenses occurred. This means with up to 16 2/3 percent annually (33 1/3 percent in the case of Snøhvit/Melkøya).
With the implementation of cash flow tax from the 2022 income year, the ordinary scheme concerning uplift was abolished. There are still some deductions for uplift due to the temporary rules in section 11 of the Petroleum Taxation Act.
The uplift is a special income deduction in the basis for calculating the special tax. The calculation basis for the uplift is the expenses for the acquisition of pipelines and production facilities pursuant to section 3, letter b, of the Petroleum Taxation Act, which means the same basis as for depreciations.
From and including the income year 2023, the uplift is included as a permanent difference, while uplift for earlier years was a separate deduction in the calculation of the special tax basis. This represents only a technical change in the calculation.
Pursuant to the temporary rules in section 11 of the Petroleum Taxation Act, expenses for the acquisition of fixed assets pursuant to section 3, letter b, of the Petroleum Taxation Act could be recognised immediately in the special tax basis for the 2020 and 2021 income years with an additional uplift of 24 percent. The rules also had an effect for future years, but with a reduced rate of 17.69 percent for uplift for the 2022 income year and a rate of 12.4 percent from the 2023 income year. This applies to expenses related to the acquisition of fixed assets pursuant to section 3, letter b, of the Petroleum Taxation Act that are covered by the following plan, application or notification approved by the Ministry of Energy (previously the Ministry of Petroleum and Energy):
- a plan for development and operation (PDO) pursuant to section 4-2 of the Petroleum Act, received by the Ministry of Energy before 1 January 2023 and approved before 1 January 2024, or
- a plan for installation and operation (PIO) pursuant to section 4-3 of the Petroleum Act, received by the Ministry of Energy before 1 January 2023 and approved before 1 January 2024, or
- an application for exemption from the requirement to submit a plan pursuant to section 4-2, subsection 6, and section 4-3, subsection 4 (see section 4, subsection 6), of the Petroleum Act, received by the Ministry of Energy before 1 January 2023 and approved before 1 January 2024, or
- a written notification (application) concerning significant deviation or alteration of conditions relating to a submitted or approved plan and significant alteration of facilities pursuant to section 4-2, subsection 7, or pursuant to section 4-3, subsection 4 (see section 4-2, subsection 7), of the Petroleum Act, received by the Ministry of Energy before 1 January 2023 and approved before 1 January 2024
The plan, application or notification referred to above must be approved by the Ministry of Energy after 12 May 2020. The expenses must have occurred in the year for the planned start of production or operation for the facility at the latest.
The transfer of fixed assets that fall under the scope of section 3, letter b, of the Petroleum Taxation Act normally occurs together with associated production licences, and the taxation is then especially regulated by section 10 of the Petroleum Taxation Act.
Apart from this, the Petroleum Taxation Act has special rules concerning the realisation of fixed assets that fall within the scope of section 3, letter b, of the Petroleum Taxation Act.
Pursuant to section 5, subsection 4, of the Petroleum Taxation Act, gains upon the realisation of fixed assets that fall within the scope of section 3, letter b, of the Petroleum Taxation Act must be recognised in full in the special tax basis in the year of realisation. Accordingly, losses are deducted in full. Withdrawals of fixed assets from activities that fall under the scope of the special tax are considered equivalent to realisations. The same applies when a fixed asset no longer qualifies for deduction.
Under offshore general income, the gain must be recognised with at least 16 2/3 percent annually (33 1/3 percent in the case of Snøhvit/Melkøya). Equivalent losses are deductible with up to 16 2/3 percent annually (33 1/3 percent in the case of Snøhvit/Melkøya). The remaining cost price for a fixed asset that loses its use value upon the conclusion of the production from subsea petroleum deposits can be deducted in the concluding year. These rules are set out in section 3, letter f, of the Petroleum Taxation Act.
For fixed assets mentioned in section 3, letter b, of the Petroleum Taxation Act that are realised in the 2021 income year or earlier, gains and losses in the special tax basis must be treated the same as in the basis for general income, which means a recognition of income and deduction with at least 16 2/3 percent (33 1/3 percent for Snøhvit/Melkøya) annually.
Uplift must be calculated upon the realisation of a fixed asset that is covered by the ordinary rules, see section 11, subsection 5, of the Petroleum Taxation Act. The same applies to the realisation of fixed assets that are covered by the transitional rule in Act no. 47/2022 IV .
There are rules that limit the right to tax deductions for financial items related to offshore activities (in other words, in the offshore general income and the income subject to the special tax): Interest payments and currency items related to interest-bearing debt are deductible, but this is limited to a share corresponding to 50 percent of the ratio between depreciated offshore assets in the special tax basis as at 31 December and the average interest-bearing debt. The average interest-bearing debt is calculated throughout the year and is subject to the use of average exchange rates in the case of a foreign currency debt.
As a result of the introduction of the cash flow tax in the special tax regime from and including the 2022 income year, the share of financial items allocated to offshore activities will be very small because the tax value of offshore assets in the special tax basis amounts to approximately zero.
Financial items that are not allocated to offshore activities, are subject to deduction in onshore general income. In the case of insufficient onshore general income, these financial items may instead be deducted from the offshore general income.
To avoid that the tax rules act as an incentive for or against restructuring, shares in production licences cannot be transferred without the Ministry of Finance consenting to the tax effects of the transaction. This is regulated under section 10 of the Petroleum Taxation Act. Consent may be given in the form of a so-called section 10 decision.
The Ministry of Finance also adopted an additional regulation on 1 July 2009, covering the most commonly occurring transaction types, so that applications for consent and the subsequent issuing of individual decisions could be replaced by a (detailed) account of the (planned) transaction. Consent to the transfer of shares in production licences is considered as given if the transaction fulfils the requirements laid down in the regulation, and if information concerning the transaction and the transfer agreement were sent to the Ministry of Finance and the Oil Taxation Office.
In an attachment to their tax return, companies must provide the necessary information, so that the office is able to perform the necessary checks linked to the transfers.
Companies that are not in a tax position, will receive payment of the tax value of their special tax deficit in the year following the income year. This ensures equal treatment of the companies subject to the special tax. Ordinary company tax deficit (both offshore and onshore) is carried forward without interest in the same way that applies to other industries onshore.