Resource rent tax on aquaculture

We are reviewing the Ministry of Finance’s proposal to introduce a resource rent tax on aquaculture.

In brief

• According to the Ministry's proposal, resource rent tax will be introduced with effect from 1 January 2023 and involves the taxation of resource rent at an effective tax rate of 40 percent with a tax free allowance of between 4 000 - 5 000 tons.

• The resource rent tax will apply to the production of salmon, trout and rainbow trout in the sea.

• The tax revenues are estimated at about NOK 3,65-3,8 billion annually, but the estimate is uncertain, and the industry believes it will be higher.

On Wednesday 28th of September 2022, the Ministry submitted for consultation a proposal for the introduction of resource rent tax on aquaculture. The aquaculture industry utilizes fjords and sea areas that belong to the public, and as such the background for the proposal is that the Government wishes, through a resource rent tax, that the public retains more of the value generated through the exploitation of these resources. According to the Ministry, the production of natural resources often generates a return in excess of what is normal through utilization of public area, often referred to as resource rent. By introducing a resource rent tax, the Government wants some of this economic rent to be returned to public. The proposal includes the production of salmon, trout and rainbow trout and the Ministry proposes an effective tax rate of 40 percent. Furthermore, it is proposed that the resource rent tax should be distributed equally between the state and the local municipalities.

What is the content of the proposal?

The Ministry proposes to design the resource rent tax as a cash flow tax. If introduced, income and investments will be taxed on an ongoing basis in the year in which they are earned/incurred. When determining income, one model is proposed for salmon and another for trout and rainbow trout. It is proposed that revenues from salmon shall be determined on the basis of a norm price to counteract tax motivated pricing. The norm price will be set on the basis of prices for salmon on a public exchange. For rainbow trout and trout, there are no listed commodity prices, and therefore the income will be based on actual sale prices.

Who is affected?

The resource rent tax will apply to income from commercial licenses for production of salmon, trout and rainbow trout in the sea for consumption, regardless of how the holder of the license is organized. The resource rent tax will not affect production at land-based facilities or development licenses unless such a permit is converted to an ordinary license for fish consumption. The proposal is designed not to apply to the smallest companies. These are excluded by the introduction of a tax-free allowance of between 4,000 and 5,000 tons of biomass. According to the proposal, the consequence is that approximately 65-70 percent of aquaculture companies are not affected by the new rules. This group represents a significant number of the companies operating in the aquaculture industry, but the companies do not account for more than 15 and 17 percent of the total biomass. Thus, the main part of the Norwegian aquaculture industry will be affected by the new proposal. Both the largest companies, but also companies that are relatively small compared to the large players on the market will be affected.

The tax-free allowance

The Government proposes a tax-free allowance based on an estimated average profit per ton of biomass which can be deducted from positive resource rent income. The tax-free allowance amount means that the smallest players may be exempted from resource rent tax and can also be seen as a standard deduction for historical purchases of permits. The Government proposes that the tax-free allowance should be set at 4 000 tons biomass or 5 000 tons biomass in 2023. According to the proposal, the tax-free allowance is granted at group level in order to counteract adjustments through splitting into several companies. It is also proposed to establish rules at the ownership level, so that companies owned by the same person and their close associates only receive the tax-free allowance once. Related parties will be defined in section 19-3 (3) of the Norwegian Tax Act.

Tax consequences

The Ministry proposes a tax model similar to the models used for hydropower and petroleum, where ordinary corporate tax is calculated first and thereafter the resource rent related the corporate tax is deducted from the basis for the resource rent tax. It is proposed that fixed assets acquired before the introduction of the resource rent tax should be deductible through depreciation of remaining tax values. No deductions will be given for the cost of the fish licenses or costs incurred in connection with the acquisition of a license. On the deduction side, actual costs are used as a start, but a standard deduction may be considered for some costs. The Ministry proposes that if a company has a negative estimated resource rent income, this should be carried forward with interest and be deducted from positive resource rent income in the future. It is proposed that the effective resource rent tax rate is set at 40 percent. In conjunction with the ordinary corporate tax, this leads to an overall effective marginal tax of 62 percent on proceeds from salmon, trout and rainbow trout (0,22 + 0,4 = 0,62). For example, if the tax free allowance amount in a year is NOK 54 million, profits exceeding this amount will be taxed at 62 percent.

EY comments:

• Impact on the wealth tax: The new resource rent tax is likely to affect the net wealth taxation of aquaculture licenses for non-listed companies. Today, the tax value of time-unlimited aquaculture permits in non-listed companies is calculated according to the market value of the permit as of 1st of January in the tax assessment year. From 2022, aquaculture licenses acquired before 1998 will also be included in the wealth tax basis. The market value of the license may be reduced as a result of a resource rent tax of 40 percent. Such a reduction in the basis for net wealth tax may result in limited benefits for the owners of aquaculture companies. The consultation paper refers to the fact that the introduction of a resource rent tax may have a price-reducing effect on future auctions and secondary sales of aquaculture licenses. But the effect on the market price may also be affected somewhat in the opposite direction for some industry players, as companies with a low maximum permitted biomass (i.e., less than the tax-free allowance) may be more inclined to pay for aquaculture licenses.

• Possible unpredictability: As described, it is proposed that the tax-free allowance be set at 4,000 or 5,000 tons. The proposed amendments to the Norwegian Tax Act provide that the tax-free allowance amount should be «be decided for each year by the Parliament» cf. proposal for section 19-7, first paragraph. The tax-free allowance could thus be reassessed each year, which could reduce predictability when estimating the future tax costs.

• Calculation of profit on salmon: As highlighted, the consultation paper proposes that the profit on salmon should be calculated according to a norm price. This norm price will be set based on the stock exchange price of salmon, i.e., it is not the price the salmon was actually sold for that is decisive. Taxation according to a norm price may have consequences for companies with fixed-price agreements. In current salmon market, salmon is often sold both at a spot price and at a fixed price. Fixed-price agreements vary in length and some last for several years. This may affect the effective tax rate as the pricing of such contracts may deviate from the norm price. As such, If the norm price is set higher than the agreed fixed price, the company will in practice have to pay more than 40 percent resource rent tax. For example, if the norm price is set at NOK 70 per kg, while the agreed price is NOK 60 per kg, the company must pay tax on NOK 70 even though the salmon was actually sold for less. Fixed-price agreements have so far provided companies with predictable income limiting market fluctuations. However, if the resource rent tax is implemented as proposed, the consequence is that fixed-price agreements will result in a tax exposure instead of a market risk.

Contacts:

Harry Veum, Partner, +47 976 13 311
Tordis Borgen, Senior Manager, +47 982 06 451
Nadia Jarnæs Risnes, Staff, +47 480 20 497