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Norway: Amendments to petroleum tax law

Norway: Amendments to petroleum tax law

There are important “provisional” or temporary amendments to the petroleum tax law that are intended to boost investments in the oil and gas sector and in particular to stimulate investments on the Norwegian continental shelf.

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Background

Earlier in 2020, the government proposed certain temporary changes to the petroleum tax system, in an effort to maintain oil and gas investments during a period of falling oil prices and reduced activity due to the COVID-19 situation. Read an April 2020 report prepared by the KPMG member firm in Norway.

The proposed measures then were subject to discussion in Norway’s Parliament, and ultimately, on 8 June 2020, a broad political agreement was reached when the government's proposed tax relief for extraction and production (E&P) companies was expanded, mainly by an increased “uplift allowance” (from 10 % to 24%) and an extended period for the temporary rules. The purpose of the amendments to the petroleum tax act is to maintain and to provide for continued investment and activity in the Norwegian petroleum sector.   

The parliamentary Finance Committee's recommendation to the Parliament was passed on 12 June 2020 without any further comments. The relevant document is Innst. L 351 (2019-2020).


Legislative changes

The changes to the petroleum tax system (effective for 2020) are mainly accomplished under section 11 of the petroleum tax law and include the following:

  • Immediate expensing of offshore petroleum investments in 2020 and 2021 for purposes of the 56% special tax base. With regard to the “22% corporate tax base,” the current six-year straight-line depreciation continues to apply.
  • An uplift allowance of 24% of investments under the immediate expensing measure listed in No. 1 immediately above can fully be taken in the year of investment—i.e., a tax benefit of 13.4% of the relevant investment.
  • In addition, certain grandfathering rules allow a similar immediate expensing measure (under No. 1) for investments related to the plan for development and operation (PDO), the plan for installation and operation (PIO), and certain other plans for approval that are filed within the period beginning 1 January 2023 and approved by 1 January 2024 (and not prior to 12 May 2020). This will cover investments until and including the year for planned production start for the actual field/investment (as approved by the Ministry of Oil and Energy).
  • A right to a refund of the “tax value” of losses incurred in 2020 and 2021. This also includes unused uplifts from investments made in 2020 and 2021. Under the current system, such losses (except for exploration losses that have their own “refund system”) would have been carried forward with a risk-free interest, and a potential refund would come only if company ceased its E&P business with unused losses (and unused uplift). 

E&P companies pay advance “installment tax” on a bi-monthly basis, for six periods starting in August of the income year. The installment tax is set by the Oil Tax Office. The installment tax is based on an estimate for the full year tax, with a “balancing settlement” being set out in December of the following year. In order to further improve the loss-making company’s liquidity in 2020 and 2021, the new measures provide a “negative installment tax”—i.e., a refund can be paid out in six installments starting in August 2020, as an advance payment of the refund for the “tax value” of losses that otherwise would have been paid to the companies in December 2021. The negative installment tax is to apply for companies in position for an “exploration refund” for 2020 and 2021.

The measure for immediate expensing against the special tax basis will have implications for the interest deduction. A certain portion of the interest deduction under existing law allows for a deduction in the 78% basis, and the allocation is based on tax-asset values per year-end. It is this special tax basis that is used for allocation of interest costs. The relevant tax-asset value for interest allocation will then be zero (0), and tax relief will be limited to 22% with respect to the investments covered by the temporary changes to the petroleum tax law.


KPMG observation

The provisional changes are expected to increase the attractiveness of the Norwegian continental shelf for investors in the oil and gas industry, as has been noted that several projects have already been approved for further investments.

The government is expected to issue more detailed regulations with respect to the temporary changes to the petroleum tax law.


For more information, contact a KPMG tax professional in Norway:

Per Daniel Nyberg | +47 4063 9265 | per.daniel.nyberg@kpmg.no

Jan Samuelsen | +47 4063 9395 | jan.samuelsen@kpmg.no

Jonas Odland | +47 952 32 874 | jonas.odland@kpmg.no

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