by Tore Fjørtoft, Cecilie Amdahl, Hugo P. Matre, Erik S. Andresen, Eline V. Grøvdal and Sigrid R. Østvik
The Norwegian Government’s bill Prop. 78 LS (2022-2023) is in line with the principal points of the consultation proposal, but with several adjustments. Please see also our newsletter on 5 October 2022 on the consultation proposal.
The resource rent tax rate is set at 35%, a basic tax-free allowance of NOK 70 million is introduced, and the production tax is increased from NOK 0.56 per kilo to NOK 0.90 per kilo. The Government has abandoned the proposal of using a norm price based on NASDAQ prices, and instead proposes that an independent price board from 2024 shall determine the market value for the salmon when removed from the pen.
The Government proposes to reduce the tax rate from the original proposal of 40 to 35%.
The Government originally estimated that a tax rate of 40% would result in tax revenues of between NOK 3.65 to 3.8 billion in 2023. The industry has pointed out that the consultation proposal would result in considerably higher tax revenues than the Government’s estimate. In their final proposal the Government points out that there is no target for specific annual tax revenues, nor has it been estimated what the tax revenues are expected to be.
The Government proposes to increase the production tax significantly, from NOK 0.56 to 0.90 per kilo from 1 July 2023. The production tax can be deducted from the resource rent tax. The natural resource tax initially proposed in the consultation memorandum has been abandoned.
The share of auction revenues etc. for municipalities and county authorities is proposed to be increased from 40 to 55%. This, together with the production tax and additional appropriation, will contribute to accruing half of the gross revenues from the resource rent tax to the municipality sector.
The Government has withdrawn its initial proposal for a resource rent tax based on norm prices, and instead proposes that the tax basis shall be determined by an independent price board from 2024. For 2023, the tax basis will be set based on the market value of the fish upon removal from the pen, which companies shall determine themselves by so-called self-determination.
The market value of the fish upon removal from the pen will be used as a basis for determining the resource rent taxable income. Conditions that increase fish value after this point, will therefore not be included in resource rent taxable income. Gross resource rent income is determined by multiplying the price determined by volume sold. In principle, the tax settlement point shall be upon removal of the fish from the pen, but due to practical reasons the government proposes that the gross resource rent income is based on slaughtering volume.
The basic tax-free allowance is set at NOK 70 million and is not linked to maximum permitted biomass as in the original proposal.
The resource rent tax will be structured as a cash-flow-tax, with immediate deductions for investments that are solely used during the sea phase.
The Government maintains the proposal for incurred costs associated with the resource rent taxable business in the sea phase, can be deducted from the calculation of the resource rent taxable income. This will typically include costs such as the purchase of stock, feed, prevention and treatment of lice/disease, environmental measures, catching of escaped fish and care. Labour costs and other staff costs, maintenance costs, insurance and administration are included to the extent that the costs are related to the sea phase in the aquaculture business.
The Government maintains that deductions will be granted for investments made prior to 1 January 2023 through depreciation of remaining tax values.
In principle, newly acquired assets can be deducted immediately in the resource rent income, while existing assets must be depreciated for the residual value. In order to prevent this inequality from giving incentives to separate the license in a separate resource rent taxable company from the date of entry into force, the Ministry has proposed that the tax input value of the purchaser be set equal to the residual value of tax at the time of the transfer of existing fixed assets under the group purchase. This implies that the residual value of the assets will be subject to depreciation in the purchaser’s resource rent tax and cannot be deducted immediately.
No deduction will be granted for the value of fish farming licenses. However, a template deduction is given in revenue for licenses purchased on auctions in 2018 and 2020 and allocated at fixed prices in 2020. The deduction is set at 40% of the actual remuneration paid to the central government divided over five years and constitutes a change to what was stated in the consultation proposal.
Negative resource rent taxable income can be carried forward with interest, and if activities cease, the tax value of the negative resource rent taxable income will be disbursed. The Ministry will assess how a disbursement claim at cessation can be mortgaged.
In the initial proposal, the resource rent tax was to include activities in the economic zone and on the continental shelf. The Government now proposes limiting this to ordinary commercial fish farming licenses, so that the resource rent tax has the same geographical scope as the remaining provisions of the Norwegian Tax Act.
As in the consultation memorandum, the Government suggests that the tax subject should be holders of limited aquaculture licenses for fish farming for consumption of salmon, trout and rainbow trout. However, an adjustment has been proposed to the legal text in order to clarify the connection between the tax subject and resource rent taxable licenses.
In particular cases, exceptions may be made from the prohibition of rental under the Norwegian Aquaculture Act Section 19 third paragraph. In the event of rental of aquaculture licenses, the tax subject shall be the lessor who formally holds the aquaculture license. However, the income and costs of the actual rental of aquaculture licenses shall not be included in the income basis for the resource rent tax.
The Government expands the originally proposed definition of a company group. A company shall be considered a parent company if it “owing to agreement” has “determinative influence” over another company. This definition is in accordance with the group definition in the Nw. company legislation.
The definition of an associated person is also expanded: If a personal owner, alone or together with one or more associated persons, has a controlling influence over two or more companies or parent companies, these companies and their subsidiaries shall also be considered a group.
The Government upholds that the resource rent tax shall enter into force from 1 January 2023. Despite the fact that the terms of the tax were unclear at this time, and that the terms will probably not be made clear until the resolution in the Norwegian Parliament in June 2023, i.e., almost six months after the effective date.
Simultaneously, it is proposed to introduce a valuation discount of 50% upon determining the wealth taxation on aquaculture licenses. The proposal will reduce the significant tax burden for individual taxpayers due to the fact that aquaculture licenses have been considered as taxable wealth from the fiscal year of 2022.
Note that the valuation discount of 50% has been proposed to be reassessed after four years, as the discount is introduced to facilitate the overall tax burden in the transition to the new resource rent tax rules. In addition, the Government points out that there is a risk that the proposed valuation discount constitutes a competition-distorting state aid in breach of the EEA Agreement's rules on state aid for the fisheries sector, as it will only apply to owners of non-listed aquaculture companies.
The consultation memorandum did not contain any assessments of the consequences the introduction of resource rent tax will have for private operators, such as aquaculture companies and the supplier industry. The bill has a very scarce and only a general mention of the economic consequences for private individuals, which may indicate that a thorough consequence analysis has not been carried out in accordance with the requirements in the Norwegian Instructions for official studies and reports. For example, the consequences for the supplier industry are significant, but this has not been investigated by the Government. Investments for several tens of billions of NOK have been put on hold. In our opinion, the proposal should have included a more detailed assessment on how the proposed tax is likely to affect the seafood industry and related industry.
The Government's final law proposal have been adopted in the King in Council on 28 March 2023. Although the terms of the resource rent tax may be adjusted during the Norwegian Parliament's deliberation of the case, there is reason to assume that a resource rent tax will be adopted by the Norwegian Parliament. Only the party FrP has taken a clear stance against the introduction of a resource rent tax in advance. The Government has invited the Parliament to a broad agreement on the tax, but both the parties Høyre and FrP have rejected their participation. The party SV has, on the other hand, demanded an increased resource rent tax rate.
It is expected that the Norwegian Parliament will adopt the resource rent tax in June 2023.
A regulation on the organisation of the independent price board and the determination of tax settlement prices will be sent for consultation.