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Norway Defends Oil Tax Regime

by Ulrika Lomas, Tax-News.com, Brussels

14 February 2018


The Norwegian Government has defended its tax regime for oil exploration against a complaint that it breaches European Economic Area (EEA) state aid rules.

The European Free Trade Association Surveillance Authority (EFTA Surv) is investigating a complaint by Norwegian environmental group Bellona that Norway's system of tax deductions and loss carry-forwards for exploration expenses is overly generous to companies in the oil sector, and therefore constitutes state aid under the EEA Agreement.

However, in a letter responding to a request by the EFTA Surv for additional information, the Norwegian Ministry of Finance maintained that "the Norwegian rules on reimbursement of the tax value of exploration costs and on loss carry forward with interest in the Norwegian Petroleum Tax Act do not constitute state aid under Article 61 of the EEA Agreement."

"The rules are hence in compliance with the EEA law," the ministry added.

Petroleum extraction companies operating in Norwegian oil fields pay a combined tax rate of 78 percent, including the ordinary rate of corporate tax and the special tax on petroleum.

However, Norwegian legislation permits companies to deduct all costs connected with exploration, and to carry forward losses to subsequent years with interest. In addition, under rules introduced in 2005, which were intended to encourage new entrants to the market, companies may choose between carrying forward their losses, or applying for an immediate refund of the tax value of exploration costs from the tax authority. It is the reimbursement scheme that is the focus of Bellona's complaint.

This system, the Norwegian Government argues, is designed to ensure neutrality in the petroleum tax regime, and recognizes that companies must make considerable investments in terms of time and resources to turn a potential oil discovery into an economically viable field.

"A neutral tax system will ensure that petroleum resources that are profitable to develop before tax, are profitable for companies after tax, and vice versa. A neutral tax system requires symmetrical treatment of costs and income, i.e. that all relevant costs can be deducted against the same tax rate as the income is taxed," the ministry wrote in the letter.

"This means that if income derived from petroleum activity is taxed at a rate of 78 percent, the state, through the tax system, should cover a corresponding share (78 percent) of the costs incurred to earn this income. This applies to exploration costs as well as to other costs related to the petroleum activity," it added.

The ministry said that almost 87 percent of the cash flow from Norway's petroleum sector will be collected as state revenue in 2018, an amount equal to NOK3,900 trillion (USD490bn).

TAGS: environment | compliance | Finance | tax | investment | interest | energy | law | corporation tax | Norway | oil and gas | tax authority | legislation | Europe | Tax

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