Petroleum activities on the Norwegian continental shelf are taxed through ordinary income tax, a special tax, various indirect taxes and dividend from StatoilHydro. The central government also receives revenues through its direct ownership stake in oil and gas fields on the shelf (SDFI). In 2006, central government received revenues totalling NOK 355.4 billion from the petroleum sector.
Direct taxation of petroleum activities
The taxation of petroleum activities is based on the rules governing ordinary business taxation. There is considerable excess return (resource rent) associated with the extraction of oil and gas. Therefore a special tax of 50 pct. on income from petroleum extraction has been introduced, in addition to the ordinary income tax of 28 pct. Consequently, the marginal tax rate on the excess return within the petroleum sector is 78 pct. In brief, the tax calculation may be described as follows:
Sales income (calculated by norm prices)
- Operating costs (inclusive of exploration costs and indirect taxes)
- Depreciation (calculated by rules particular to the petroleum sector)
- Net financial costs (based on the ratio between the tax value of operating assets on the shelf and the average interest-bearing debt over the tax year)
- Losses carried forward from previous years
= Ordinary tax base taxed at 28 pct.
- Uplift (investment-based "supplementary depreciation")
- Unused uplift carried forward from previous years
= Special tax base taxed at 50 pct.
The norm price system
The petroleum industry is characterised by extensive integration between purchasers and sellers. Therefore a system of administratively determined petroleum prices, norm prices, has been introduced for tax purposes. This system covers petroleum produced on the Norwegian continental shelf. The norm price shall correspond to the price at which petroleum could have been traded between independent parties in an open market. Norm prices have only been determined for crude oil.
Binding advance tax rulings for internal gas sales
Sales of natural gas are taxed on the basis of the sales price actually achieved, except in cases where gas is sold between parties with a commonality of interest (internal sales) and the price deviates from market terms. In such cases, the tax authorities may make corrections in accordance with the arm’s length principle. A company may, with effect from 1 January 2006, request the Oil Taxation Office to render a binding advance tax ruling as to what price shall form the basis for the tax assessment of internal sales.
The depreciation rules
Expenses incurred in the acquisition of production facilities and pipelines may be subjected to linear depreciation schedule over 6 years (up to 16 2/3 pct. annually) as from the year during which the investment is made. Furthermore, partial investments may be depreciated on an ongoing basis.
As from 2007, a new rule for the calculation of deductible financial costs was introduced. The rule implies that net financial costs incurred on interest-bearing debt are deductible. The deductible net financial costs shall be comprised of the sum of interest costs and foreign exchange losses, less foreign exchange gains, pertaining to such debts. The deductions shall equal such proportion of the net financial costs of the company as corresponds to 50 percent of the ratio between the value of assets attributed to the shelf district (net of tax depreciation as per 31 December of the tax year) and the average interest-bearing debt over the tax year. Other financial income and expenses shall be attributed to the onshore district.
The purpose of the uplift is to contribute to ensuring that normal returns are not subjected to special tax. As from 2005, the uplift represents 7.5 pct. of the cost price of depreciable operating assets, and such a deduction from the special tax base is granted annually for four years as from the year in which the investment is made (a total of 30 pct.). If the tax base is negative, any excess uplift may be carried forward.
Loss carry forward
To ensure that new companies receive the same tax treatment as the established ones, special rules have been introduced concerning loss carry forward with interest and payment of the tax value of losses. As from 2002, loss may be carried forward with interest. As from 2005, the central government will make annual payment of the tax value of losses associated with the exploration activities of companies recording a loss for tax purposes. The central government will also make payment of the tax value of losses upon the termination of activities on the Norwegian shelf.
Other revenues from petroleum activities
A CO2 tax shall be paid per litre of oil and natural gas liquids and per standard cubic metre of gas burnt off or emitted directly to air on platforms, installations or facilities used in connection with the extraction or transportation of petroleum on the Norwegian continental shelf. The tax is classified as a deductible operating cost associated with petroleum activities, which contributes to reducing the ordinary tax and special tax actually paid by the oil companies. As from 1 January 2007, the tax is NOK 0.80 per litre of oil or per standard cubic metre of gas.
The area fee rules were amended with effect from 1 January 2007. The new rules require companies to pay NOK 30,000 per square kilometre the first year, and NOK 60,000 the second year. As from the third year, companies will be paying the maximum fee of NOK 120,000 per square kilometre. Companies are exempted from the area fee if they submit a Plan for Development and Operation (PDO) to the Ministry of Petroleum and Energy. Exemptions from the area fee are only granted for those areas that fall within the geographical scope of the petroleum deposits, and in respect of which a PDO has been submitted. The regulatory framework also grants an exemption from the area fee for two years if the companies are drilling an exploration well or a well delineating a deposit. During the initial period, when exploration activity is carried out according to a mandatory work schedule, the licensees pay no fee.
The State Direct Financial Interest (SDFI)
In addition to collecting direct and indirect taxes, the central government also holds a direct ownership interest in many oil and gas fields on the shelf. This arrangement implies that the central government pays a share of all investments and operating costs corresponding to the ownership interest of the central government. Thereafter, the central government receives, like the other licensees, a corresponding share of the revenues from oil and gas extraction on the relevant field. The ownership share of central government varies from one field to the other.