On 28 September 2022, the Norwegian Government has proposed dramatic tax increases for energy producers and the aquaculture industry. Even though the Government had previously warned that taxes could be increased, the proposals were sudden and unexpected. The proposals include an introduction of a resource rent tax for aquaculture and for onshore wind power, increased resource rent tax for hydropower, and temporary additional taxon high power prices. In this article, we will provide a brief overview of the proposals.
Resource rent tax on aquaculture – tax rate on income has increased from 22% to 62%
Under current rules, the aquaculture industry pays ordinary income tax on profits. The aquaculture industry is also subject to an export tax and an excise duty of NOK 0.405 per kilogram of fish produced. Further, companies in the industry may be subject to property tax.
The Government is now proposing a profits-based resource rent tax for aquaculture with effect from 2023. The Government points out that aquaculture activities give rise to extraordinary returns (resource rent), because of limited locations and permits.
The resource rent tax will apply to the production of salmon, brown trout and rainbow trout. The Government indicates that the production of other species is limited and does not generate significant resource rents. Further, the resource rent tax only applies to a limited number of aquaculture permits for edible fish farming in seawater. Development permits are not affected, unless they are converted to ordinary edible fish permits. The proposal does not affect special permits at sea or onshore aquaculture operations.
The tax will be designed as a cash flow tax. This means that income and investments will be taxed on an ongoing basis in the year they are earned/incurred. Resource rent will be taxed at 40%, which will give a total effective tax rate of 62% (40% + 22% corporation tax).
The proposal implies that corporation tax will be calculated first. Corporation tax related to resource rent will then be deducted in the basis for the resource rent tax. This is equivalent to the model used for resource rent tax for hydropower and petroleum. In order for the effective tax rate to be 40%, the resource rent tax will be formally set at 51.3%. Simultaneously, companies will be entitled to higher deductions for investment costs during the investment year (51.3% instead of 40%). The Government notes that this solution also involves a greater degree of tax deferral, with less resource rent tax payable during the investment phase, but more tax due in the production phase.
The proposal will include income from activities based on aquaculture permits. Profits from the sale of aquaculture permits will not be included in the resource rent tax, and no deductions will be granted in relation to the acquisition costs of such permits.
A basic allowance of 4,000 – 5,000 tons will ensure that only the largest operators pay the resource rent tax. This basic allowance will also reduce receipts of the largest operators, who will benefit from lower resource rent tax as a result. In order to prevent corporate adaptation in response to this proposal, in the form of companies splitting into multiple entities, rules will be established at the owner level.
It is proposed that negative resource rent income shall be carried forward with risk-free interest and deducted in future income, rather than being a direct payment like in the oil industry. The Government believes that payments in relation to annual negative tax positions may pose challenges before it has been established how resource rent taxation works. Yet, they have indicated that a payment scheme may be considered at a later time.
Furthermore, it is proposed that the current excise duty rate shall be increased and that a natural resource tax shall be introduced. These will be deductible from the resource rent tax and will function as a distribution mechanism of the proceeds between the municipalities and the state.
Annual tax revenues are estimated at NOK 3.65-3.8 billion, and will be distributed equally between the state and the municipal sector.
Resource rent tax for onshore wind power also increases tax on income to 62%
The Government is also proposing the introduction of a resource rent tax for onshore wind power plants from 2023. This proposal covers onshore wind power plants which are subject to licensing in accordance with the Energy Act.
The proposed resource rent tax is designed as a cash flow tax. This means that revenues and investments are taxed on an ongoing basis in the year in which they are earned/incurred. Resource rent tax will be subject to a rate of taxation of 40%, which will result in an overall marginal tax rate of 62%.
The formal resource rent tax rate will be set to 51.3%, as a result of corporation tax being calculated before the resource rent tax, and that resource rent-related company tax will be deducted in the basis for resource rent tax.
Revenues from energy production are usually determined on the basis of spot market prices. Exceptions from the spot market price apply to existing fixed-price agreements entered into before 28 September 2022. Income from the sale of guarantees of origin and electricity certificates is included in the basis for the resource rent tax.
Negative calculated resource rent income can be carried forward (including interests) and deducted from positive calculated resource rent income in later years.
Further, the Government proposes to double the excise duty applicable from NOK 0.01 to 0.02 per kWh. The duty will be deductible from the fixed resource rent tax. This will function as a distribution mechanism of the proceeds between themunicipalities and the state.
The Government estimates that this tax will generate around NOK 2.5 billion in tax revenues. The aim is that half of these tax revenues shall go to the municipal sector.
The proposal will be referred for public consultation before the end of the year. Find more information here.
Increased resource rent tax on hydropower from 37% to 45%
Further, the Government is proposing to increase the effective resource rent tax rate for hydropower from 37% to 45% with effect from the 2022 fiscal year. The Government has indicated that it is reasonable that a larger share of the returns from hydropower goes to the community. It is estimated that this proposal will increase tax revenues by approximately NOK 11 billion annually.
Corporation tax will be calculated before the resource rent tax, and is deducted from the basis for the resource rent tax. Therefore, an effective rate of 45% means that the formal rate will be set to 57.7%. In total, the marginal tax rate for hydropower production will rise to 67% (resource rent tax at 45% + corporation tax at 22%).
The Government also proposes to include income from sale of guarantees of origin and electricity certificates in the basis for resource rent tax.
Small hydropower plants do not pay resource rent tax, and are therefore not affected by this proposal.
You can find more information about this proposal here.
For certain types of fixed-price agreements for hydropower, it is proposed that resource rent tax shall be based on the actual income of the power producer, rather than the spot market price as is generally the case. This is meant to facilitate better fixed-price agreements on electricity for end users. The proposal has already been subject to consultation, and will be further specified in regulations. The Government aims for implementation on 1 January 2023. Read more about this measure here (Norwegian only).
Extra tax on high energy prices
In addition, the introduction of a high-price contribution for wind and hydropower has been proposed in the form of an excise duty. The rate is 23% of energy prices that exceed NOK 0.70 per kWh. This high-price contribution will be calculated on the basis of the actual prices achieved by the taxable party, limited to revenues from energy production. The contribution will be calculated hourly per price range.
For hydropower plants with generators with a total rated output of 10,000 kVA or more, the high-price contribution will apply from 28 September 2022. From 1 January 2023, it will also apply to hydropower plants of at least 1 MW, and for wind power plants which are subject to licensing in accordance with the Energy Act.
The high-price contribution will not be deductible from corporation tax, resource rent tax or property tax. The Government has announced that proposals for changes to ensure this will be presented in the state budget for 2023.
Power station owners will be responsible for reporting and paying the contribution. For the period from 28 September up to and including 31 December 2022, the first due date for payment will be 18 January 2023. For 2023, the tax will be reported and paid monthly.
Find more information here.