Norway Considers Tax Increase in Oil Industry

Norwegian government will increase special oil tax by 1% – to 51% and cut special discounts on four-year operations of the companies from 30% to 22%.

The government estimates that these measures will help to replenish the state budget by 520 million USD a year under the ongoing instability in the Eurozone – the main economic partner of Norway.

As a result, oil and gas business in the country will have to cut their investment costs in a more reasonable way. 

According to the Minister of Finance of Norway Sigbjørn Johnsen, “Changes aim to increase the attention of oil companies to production costs.” Because, Norway’s largest oil and gas company “Statoil” has not committed to this objective before, said the government officials.

Some experts believe that these measures may reduce Norway’s oil production and, consequently lead to an increase in world oil prices due to the important role of Norway in the world, especially in the European oil market.

It was also suggested that the Norwegian oil and gas business is likely to understate their real incomes.

The Details of the Proposal

The Government proposes a transition rule for investment projects where the Ministry of Petroleum and Energy has received a plan for development and operation (PDO) or a plan for installation and operation (PIO) prior to 5 May 2013. The transition rule also applies to investments where application for exemption or written notification of any significant deviation from PDO or PIO is received by the Ministry of Petroleum and Energy prior to 5 May 2013. The transition rule only applies to investments incurred up to the same year as production starts or operation of the facility starts. For investments covered by the transition rule the current uplift of 7.5 per cent will apply.

The Government will facilitate the landing of oil and gas in Finnmark and North Troms. To achieve this, the Government will establish support measures within the rules for national regional aid within the EEA. Support measures will be notified to ESA.

The change in the uplift implies that oil companies will cover a larger share of their investment costs. Consequently, a larger share of the risk of cost overruns will also be carried by the companies. This will give rise to more cost awareness. The petroleum tax system will still be investment friendly.

The Government proposes that the ordinary business tax is reduced from 28 per cent to 27 per cent from 2014. At the same time the special tax is increased from 50 to 51 per cent. Hence, the total marginal tax rate in the petroleum sector is kept constant at 78 per cent.

The tax increase of the proposal is estimated to 70 billion NOK measured as a net present value over the period 2013-2050. This is equivalent to an annuity of approximately 3 billion 2013-NOK. The effect on tax revenue will be moderate over the first years.

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