Petroleum Tax Regulations
The taxation of petroleum resources on the Norwegian continental shelf is governed by a special law relating to the Taxation of Subsea Petroleum Deposits (the Petroleum Taxation Act).
Unless otherwise specified in this special act, general tax legislation applies.
In addition to the Petroleum Taxation Act, several regulations have been passed with regards to the companies’ accounting and fiscal management concerning the parts of their income and expenses that are subject to the Petroleum Taxation Act.
The administrative rules governing petroleum taxation can be found in the Tax Administration Act.
The Petroleum Taxation Act up to the 2020 income year
The following special rules for petroleum tax applied up to and including the 2019 income year and are no longer valid from and including the 2022 income year:
The most important fixed assets in offshore activities, namely pipelines and production installations, could be depreciated by up to 16 2/3 percent annually, in other words, on a straight-line basis over a period of six years, both in the taxation basis for the special tax and the basis for the offshore general income tax. Depreciations in connection to Snøhvit/Melkøya could be depreciated by up to 33 1/3 percent annually (on a straight-line basis over a period of three years).
Uplift was a special income deduction in the basis for calculating the special tax. Uplift was calculated based on the same investments that could be depreciated over a period of six/three years. Uplift could therefore be regarded as an extra depreciation deduction in the basis for the special tax. For 2019, the uplift constituted 5.2 percent annually over a period of four years (total 20.8 percent).
In the case of an offshore deficit being caused by costs incurred by the prospecting and exploration for petroleum resources, the company could, as an alternative to the carry-forward of the loss, claim an annual payment of the tax value of direct and indirect exploration expenses from the Government (a so-called “refund of exploration costs”).
Upon the termination of their offshore activity, a company could claim the payment of the tax value of its uncovered loss and unutilised uplift (a so-called “termination refund”).
Losses incurred with regards to both the offshore general income and to the income liable to special tax could be carried forward with interest, in other words, an interest amount was added to the accumulated deficit at the end of each income year.
Temporary changes in the Petroleum Taxation Act for 2020 and 2021
In June 2020, the Norwegian Parliament (Stortinget) decided on temporary rules concerning depreciations, uplift, and deficit. The rules are 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 11 of the Petroleum Taxation Act provided the option for immediate expense recognition for investments subject to the special tax basis with an additional uplift of 24 percent. It was further decided that companies could request to be paid the tax value of the deficit and unutilised uplift for the 2020 and 2021 income years, as well as negative instalment tax.
These temporary rules will continue to apply to certain individual investments during a period of time after 2021.
Cash flow tax from and including 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. In order to ensure the neutrality of the special tax, deduction is granted for a calculated company tax in the special tax basis. This implies a technical upwards adjustment of the special tax rate from 56 percent to 71.8 percent in order 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)|
Sales revenue (norm price for oil)
|= Basis for special tax (71.8 percent)|
The special rules of the Petroleum Taxation Act are summarised as follows:
The companies often sell extracted petroleum to intra-group companies. It would be a very difficult task for the tax authorities to assess whether 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 a 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 determined. 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.
The most important fixed assets in offshore activities, namely pipelines and production installations, can be deducted in their entirety in the taxation basis for special tax for the income year in which the expenses occurred. 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), in other words, on a straight-line basis over a period of six/three years, respectively.
Other fixed assets are depreciated according to the general rules of the Taxation Act, both with regards to the taxation basis for the special tax and the basis for the general income.
There are rules that limit the right to make 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 debts are deductible, but this is limited to a share corresponding to 50 percent of the ratio between depreciated offshore assets in the taxation basis for the special tax 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 a 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 tax rules act as 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 required information, so that the Oil Taxation Office can carry out necessary controls related 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.
In the tax assessment for the 2022 income year, the government will in addition pay the tax value of the deficit and unused uplift incurred during the 2002–2019 income years.
The offshore companies’ ongoing tax payments (advance tax) are called instalment tax. The assessment of the instalment tax is based on the information provided by each company regarding their expected income for the year in question. The instalment tax must be paid in six instalments - respectively 1 August, 1 October, and 1 December in the income year, and 1 February, 1 April, and 1 June in the following year. There is an option to make payments larger than the assessed amounts with the second and fifth instalments. After the ordinary tax assessment, the paid instalment tax is offset against the assessed tax. Underpaid tax must be paid (and overpaid tax refunded) within three weeks after the tax assessment. Rules for calculating interest have been determined in order to prevent companies from profiting from an assessment of the instalment tax that is either too low or too high.
Offshore companies can request a binding advance ruling from the Oil Taxation Office regarding the fiscal consequences for a specific imminent disposition. This scheme corresponds mainly to the scheme used within the general tax regime. In addition, an option has been introduced to request a binding advance ruling from the Oil Taxation Office on the price that will be used as the basis for the (tax) assessment in connection with a specific contract for the sale of natural gas to a related company.