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The Norwegian Petroleum Tax Model- Introduction by Håvard Holterud, Director Tax Audits and Economics, Norwegian Oil Taxation Office “Towards fiscal.

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Presentation on theme: "The Norwegian Petroleum Tax Model- Introduction by Håvard Holterud, Director Tax Audits and Economics, Norwegian Oil Taxation Office “Towards fiscal."— Presentation transcript:

1 The Norwegian Petroleum Tax Model- Introduction by Håvard Holterud, Director Tax Audits and Economics, Norwegian Oil Taxation Office “Towards fiscal self-reliance: Capacity building for domestic revenue enhancement in Mozambique, Tanzania and Zambia”, 30-31st of March 2011,Cardoso Hotel, Maputo

2 Resource rent taxes in Norway
Oil & Gas (production from 1971) Resource rent tax introduced 1975 Tax rate 50%, total marginal tax rate 78% Net profit based CO2 tax and NOX tax (negative external effects) Royalty phased out from 2000 Hydro power (production from 1900) Resource rent tax introduced 1997 Tax rate 30 %, total marginal tax rate 58% The RRT is profit based Property tax 0,7 % (municipalities) licence fee and entitlement to buy max 10 % of power generated Petroleum: same marginal tax rate (78 pct.) since 1992

3 Design of the Norwegian Petroleum Tax System
Resource Rent: 50% special tax rate Potential for increased tax take Uplift 7,5% in 4 years compensates delayed tax deduction due to capitalization and 6 years depreciation No distortion on investment incentives Design of the government take system: Norway – high focus on neutrality – willing to wait for revenues, and no risk aversion Possible to tax the extraordinary profit without distorting incentives to invest Ordinary tax on profits applies to all industries, including resource based. No disturbance of capital allocation between industries A uniform, net profit tax rate of 28 percent levied on a broad tax base. Additional taxes in the petroleum and hydro power sectors Only levied on the extraordinary profit Neutrality demands: NPV of deductions equal to a net cash flow tax Ordinary income: 28% general corporate income tax on net income Industry neutral; same rate applied in general 6

4 The Petroleum Tax System in Norway
Sales income (norm prices for oil) - Operating costs (incl. exploration and decommissioning costs) - Capital depreciation (16,7 pct. over 6 years) - Financial costs (special limitations) - (Losses carried forward) = Ordinary tax base liable to 28 pct. tax -(Uplift -7,5% on development investment over 4 years=30%) = Special Tax base liable to 50 pct. tax Uplift 7,5% * 4 Years = 30%, deductible in Special Tax of 50%, Tax (cash) deduction from uplift: 30%*50%=15% calculated on Development Expenditure

5 Losses Carried forward real Value
Companies with no taxable income: Can carry forward losses with annual interest The interest equals risk free interest rate after tax: 5%*(1-0,28)= 3,6% Final losses can be sold or tax reimbursed from the state when business closed down Oil Taxation Office – tittel på presentasjonen

6 Exploration Expenses Reimbursement
Exploration Expenses representing a loss: Taxpayer may elect refund (pay out) of exploration costs (instead of carrying real value of exploration expenses forward) Exploration expenditure accordingly carried 78% by government and 22% by petroleum company in real terms New entrants - often smaller sized petroleum companies - in equal after tax position compared to petroleum companies with taxable income to deduct exploration expenditure from Company tax position neutral - decreases entrance barriers - increases competition Oil Taxation Office – tittel på presentasjonen

7 Financial Expenses – Allocation and Tax Deduction
Petroleum Tax Regime (Offshore) 78% Tax Rate General Tax Regime (Onshore) 28% Tax Rate Financial Expenditure deductible Offshore in 78% Tax Regime equals: Net Financial Expenditure * 50% * Tax Value Offshore Assets Interest carrying Debt Financial Expenditure includes interest and exchange losses Positive Financial Expenditure allocated equally

8 Other Petroleum Revenue Sources
Co2 Emissions (1) NOK 0,47 per SM3 Gas (2011) NOK 0,47 per liter Oil or Condensate (2011) NOx Emissions Offshore (turbines and flaring) NOK 16,43 per Kilo (2011) Area Fee: NOK per M2 Kilometer in 2007 – annually adjusted to real prices From 2007 – new system where area fee similar to a tax on non-activity Royalty : Abolished from 2000 1)Law 21. December 1990 nr regarding CO2 emissions on the Norwegian Continental Shelf Oil Taxation Office – tittel på presentasjonen

9 Total Government Take from the Petroleum Sector
History – royalty, state participation Today tax and SDFI dominant SDFI in most major oil and gas field. The state pays its share of investments and operating costs, and receives a share of production Field specific CO2-tax, NOx-tax and area fees No up-front payments, no fee on production. Profit based petroleum tax is self adjusting Accommodating periods with both high and low oil prices 1998, the government take was fairly low. This secures the companies their part of the profit in periods with low oil prices High oil prices the profitability will be high and the government take will increase correspondingly

10 The State’s Direct Financial Interest (SDFI)
The state keeps a direct interest in a number of oil and gas fields The state pays its share of investments and costs, and receives a corresponding share of the gross income from the license Each interest is decided when licenses are awarded The size of state interest depends on how promising the area is considered to be – 25% participation is common

11 Objectives of the Norwegian Petroleum Revenue system
Transparent system and fair government share Avoiding distortions of the investment incentives Stability and predictability for the investors over time Equal tax treatment of all petroleum companies (NOC) No negotiations with the companies over tax rules Simplicity, both for the tax administration and the tax payers rules can be enforced effectively (without excessive costs) possible for the companies to understand and comply with the rules

12 PetroleumTax Administration
King in Council/Ministry of Finance Ministry of Finance Tax Directorate Oil Assessment Board Appeals Board Oil Taxation Office

13 Historic development 1965: First Petroleum Tax Act – Moderate tax level, royalty important 1975: New Petroleum Tax – Introduction of high level special tax 1980: Increase in the level of special tax 1985: State Direct Financial Interest introduced 1986: Reduced tax level - No royalty on new developments 1991: Introduction of CO2-emission tax

14 1992:. General tax reform – Reduced general tax rates,
1992: General tax reform – Reduced general tax rates, corresponding increase in special tax rate, no royalty on natural gas production. No withholding tax on dividends 2000: Phasing out remaining royalty obligations 2001: Review of petroleum tax system. Interest adjustment of loss and uplift carry over 2004: Review of tax level for ”new activities” 2005: State refund of tax value of exploration losses on an annual basis 2007: Deductible financial costs based on the ratio between the tax value of operating assets and the average interest-bearing debt over the tax year

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