Today (Thursday, April 30) the Norwegian Ministry of Finance announced proposed changes to the tax regime with a view to boosting cashflow and encouraging continued investment in the Norwegian oil and gas sector. The proposals would apply for the next two years to exploration and production (E&P) companies with activities in Norway. The changes include an immediate deduction against the Norwegian special tax for capital expenditure in 2020 and 2021, rather than the existing depreciation allowance, and the ability to receive a cash tax refund on any trading loss in these two years. These will be presented to the Norwegian parliament next month (May 12).
Derek Leith, Global Oil and Gas Tax leader for EY, said:
“It is extremely rare for there to be changes to the Norwegian upstream tax regime. The proposals announced demonstrate the concern that the current slump in oil price, and likely overhang of excess supply into 2021, could have a lasting detrimental impact on the sector in Norway without some sort of fiscal response. The measures are temporary but effectively change the upstream regime into a cash flow tax for two years with the ability to monetise any trading losses arising in that period.
“At a time where there are liquidity issues in the sector, providing support in this way ought to preserve investment in projects and underpin activity in the oilfield services sector. The changes are cleverly designed because, taken alongside a reduction to the rate of uplift on capital expenditure, the overall real cost to the Norwegian Exchequer of boosting the sectors’ cashflow is partially offset by a reduction in the absolute level of tax relief provided.
“E&P companies with operations in neighbouring jurisdictions like the UK will understandably want to consider whether there are any similar changes that could be made to their regimes. Taking the UK as an example, the upstream tax regime already provides for immediate tax relief on capital investment, and has an investment allowance on such capital expenditure so there may be little that can be done there. However, the ability to monetise current year trading losses would be very welcome, as currently normal trading losses can only be carried back one year, or carried forward. Regrettably, the UK does not have a huge sovereign wealth fund that can bear the impact of that kind of cost, but the UK oil sector will be keen to discuss any measures which could boost cashflow.”