Changes in the Petroleum Tax Act due to COVID-19 and reduced oil prices

tirsdag 12. mai 2020 l l Tilbake

The Norwegian Government/the Ministry of Finance (MoF) has today presented its proposal for preliminary amendments to the Petroleum Tax Act (PTA) to encourage investments in E&P production facilities on the Norwegian Continental Shelf. The proposal was set out in a separate White Paper: Prop. 113L (2019-2020). 
The proposed amendments include:
  1. For certain projects, the companies may choose direct expensing of investments and 10% uplift, both elements with effect for the Special Tax base only;
  2. Claim for the Norwegian State’s payment of the tax value of a tax loss and unused uplift incurred in the income years 2020 and 2021 in both the Ordinary Income Tax base and the Special Tax base; and
  3. A receivable for payment of the tax value of loss and unused uplift may be mortgaged in the same way as a claim for Exploration Refund.
The right to choose direct expensing and 10% uplift in the year the cost is incurred in the Special Tax base (56%) is an alternative to tax depreciation straight line over 6 years and 20.8% uplift (5.2% for 4 years). For the Ordinary Income Tax base (22%), 6 years straight line depreciation must be applied. 
The right to choose direct expensing shall apply for all investments made during 2020 and 2021 in production facilities and assets that are part of or related to such facilities, ref. the PTA Section 3 b. In addition, projects, for which a Plan for Development and Operation (PDO), an application for relief from a PDO or information of amendment to a PDO has been submitted before 1 January 2022 and has been approved before 1 January 2023 shall qualify. For the latter projects to qualify, the PDO, the application or the information must be approved by the Ministry of Petroleum and Energy after 12 May 2020. The right to choose direct expensing and 10% uplift ends at the end of the income year, in which production or use of the facilities start, but under any circumstances the right to choose ceases after the end of 2024.
This implies that a company that chooses to directly expense investments may do so for Special Tax purposes, but must depreciate the same assets over 6 years in the Ordinary Income Tax base. 
If a company chooses to directly expense investments, no part of the investment will be included as part of the written down tax value in the PTA Section 3 d. Hence, in addition to reduced uplift (from 20.8% to 10%) the share of interest costs allocated to deduction in the Special Tax base will be reduced accordingly if the option to deduct investments immediately is used. 
The right to claim payment of the tax value of loss and unused uplift incurred during 2020 and 2021, is an alternative to carry the loss and unused uplift forward with interest. The right to payment includes both a loss in the Ordinary Income Tax base and the Special Tax base. The loss incurred in the income year is to be multiplied with the applicable tax rate in each tax base (22% and 56%, respectively). In addition, unused uplift is multiplied with the Special Tax rate (56%). Although not explicitly stated, it seems clear that losses and unused uplift incurred prior to 2020 must be carried forward based on the ordinary rules. Losses applied for refund may not be carried forward.
Since the tax value of a loss incurred in 2020 will not be paid to the company until last half of 2021, the MoF has further proposed that such receivable may be used as security for loans taken up by the company. In general, the Tax Payment Act prohibits transfers and mortgaging of claims for repayment of tax, but tax payments based on Exploration Refund under the PTA Section 3 c fifth paragraph are explicitly exempted in the law. The proposal for payment of the tax value of loss and unused uplift incurred in 2020 and 2021 follows the same format as receivables based on the Exploration Refund. This includes that if the receivable for the tax value to be paid is mortgaged, the company must deduct the investment and may not choose to depreciate over 6 years and claim uplift at the standard rate of 20.8%. Further, it should be kept in mind that the tax collector’s right to set off unpaid taxes will have priority ahead of such mortgage. 
The proposal from the MoF is limited in scope compared to the request from the E&P industry on the Norwegian Continental Shelf. Already before it was presented, the Progressive party (“Fremskrittspartiet”) and the Center Party (“Senterpartiet”) strongly argued that the proposal would not be sufficient. The Labour Party (“Arbeiderpartiet”) has not yet communicated a final position, but has indicated that “more might be needed”. The Prime Minister and the Minister of Finance both appreciate the fact that the Government is a minority government and consequently needs support from parties outside the Government to implement the proposal. Hence, it will be interesting to see what more the MoF and the Government shall have to swallow in order to reach a majority for a package to the E&P industry on the NCS. We will soon get indications, but most probably it will take up to a month for the parties to agree and formally approve the new legislation. 

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