The salmon tax – What are the consequences?


Blue ocean with some waves.
The government's proposal for a resource rent tax made waves in the aquaculture industry. When the worst shock subsides, the question becomes: What are the consequences?

The government's reasons

In its justification for the resource rent tax, the government argues that the community should receive a fair share of the value ​​created by the utilization of the community's natural resources. The odd thing about the justification is that the natural resources that are utilized – production areas in the coastal zone – have little or no alternative economic value. The fish farmers do not consume the community's natural resources. They invest to develop the fish they sell, and they bear the operational and investment risks themselves. The fish farmers are indeed allowed to establish their business in the community's sea areas, but they do not extract a natural resource that is already there, as is done, for example, in the petroleum industry.

Rather, the government's main motivation seems to be that the fish farming industry receives large profits that can be taxed at a high rate because the businesses are local, and therefore cannot move out of Norway. Therefore, we believe the resource rent tax can be called what it really is, namely a new salmon tax.

If one takes into account the state's increased income from, among other things, the petroleum sector, it is difficult to see that the salmon tax is necessary to balance the national budget. Hence, it is reasonable to believe that the primary objective is to ensure redistribution.

It is easy to draw analogies to Robin Hood, who took from the rich and gave to the poor. But the analogy doesn't quite fit. In contrast to Robin Hood, who took from the rich's abundance of funds for their own consumption, the government takes from businesses that contribute to creating good living conditions in the coastal communities. With the salmon tax, the state takes a larger share of the profit from an industry that has added great value to the districts without transfers from the state. As several have already pointed out, it can therefore be said that the proposal for a new salmon tax entails a form of transfer from the districts to the cities.

The salmon tax will discourage future investments in the Norwegian fish farming industry

One of the most important arguments against the salmon tax is that it will discourage future investments.

The government does not seem to share this view. According to the consultation paper, the government believes that the resource rent tax is neutral and makes the state a passive partner in the companies' investments: the state contributes a share of the investment cost corresponding to the tax rate because one gets immediate deductions for investments in the resource rent income. In the consultation paper the state is portrayed as an investor who makes an investment contribution by refraining from imposing a salmon tax on the part of the profit that is used for investments in the investment year, in exchange for later receiving a return in the form of salmon tax on the future profit from this investment.

There are several weaknesses with this reasoning:

  • Firstly, it does not take into account that it may be necessary for the companies to put away profits over several years before investing. The possibility of such savings is weakened by imposing a salmon tax on the profits in the years used for saving to invest in the future.

  • Secondly, for years with large investments, the basic deduction could be lost because the government has proposed that it will only be deductible from positive resource rent income.

  • Thirdly, the state does not contribute capital to finance investments. The state only refrains from imposing a salmon tax on the part of the companies' profits in the investment year that they use for investments. If the companies' savings are not sufficient to carry out the investment, the companies must finance the difference in another way. The government's proposal does not involve any direct contribution to obtaining such funding. This could have been different if the state's "investment contribution" had been paid out in cash. Then the reimbursement claim could be pledged as security for interim financing, as the case is for exploration activity in the petroleum industry.

  • Fourthly, one must keep in mind that which investments the companies can implement also depends on how much money the companies can borrow. In our view, the government does not sufficiently consider the fact that the salmon tax will weaken companies' ability to obtain loans. More on this below.

Tabell 2

The salmon tax will weaken companies' financing capability

The salmon tax will weaken companies' ability to finance loans because the tax reduces the companies' available liquidity to service debt. This is due, among other things, to the fact that no deduction is given for interest costs in the tax base. The companies must use a greater proportion of their profits to pay taxes, which could otherwise be used to service debt. This in turn reduces the banks' willingness to grant loans. The borrowing limit will decrease, and existing conditions will be tightened.

The salmon tax will also reduce companies' equity. A direct consequence of the salmon tax is that companies will have to book an increased deferred tax because latent gains on operating assets will be subject to resource rent tax. Another consequence is reduced cash flow after tax, which reduces the value of the companies' farming permits. We have already seen the best evidence of the salmon tax reducing the companies' equity. After the proposal was announced, the market value of the listed fish-farming companies fell by approx. NOK 60 billion. This is not only unfortunate for the thousands who have invested in these companies. Such a fall in value also reduces the companies' ability to borrow money to finance future investments.

Below is a list of how the salmon tax will affect the returns of those who have invested in the fish-farming businesses. The example represents a simplification, as it does not consider differences in the tax bases, basic deductions, shielding deductions or progressivity, and special valuation rules in the wealth tax. Nevertheless, it illustrates that there is a high tax pressure on capital and that there will be a lower return on already invested capital when the salmon tax is introduced.

The salmon tax will lead to structural changes

When the salmon tax significantly increases the taxation of profits and reduces companies' equity and ability to finance future investments, one can expect structural changes to mitigate the negative effects.

The minimum deduction and the consolidation provisions will create opportunities for adaptation in the form of the creation of smaller units, cross-ownership, solutions with share classes, etc. So will the standard price system, which favors those who manage to sell their products at a higher price than the standard price, and the fact that no full deduction is given for existing investments, only new investments.

When no deduction is given for financial costs, and the salmon tax weakens companies' ability to take out loans, it can also lead to structural changes to strengthen companies' ability to borrow money.

The salmon tax can also provide a financial incentive to sell the company to new owners. If it is sold to the highest bidder, there is reason to believe that we will have increased foreign ownership in the Norwegian fish-farming industry, partly because foreign owners are not subject to Norwegian wealth tax.

The fate of the proposal

The proposal will likely receive support from SV. The revenue effect of the salmon tax will also likely be included in the national budget for 2023. Although the proposal is now under consultation and will go through formal processes before it is finally adopted, it will be difficult for the government to put it aside. The income that the rules are intended to provide will already be used in the national budget.

Therefore, we believe that the salmon tax will be introduced. However, there are hopes for improvements in the proposal. For example, it should allow for a revaluation of the operating assets to fair value, so that the resource rent tax is not levied on latent gains from before the resource rent tax is introduced. Furthermore, negative resource rent income should be paid out, instead of being carried forward with a risk-free interest rate. In addition, the basic deduction should be absolute, and not only admitted to positive resource rent income. If the government wishes to stimulate environmental investments, rules with direct deductions in resource rent tax for qualifying environmental investments could also be considered.

The total effects

The total effects of the new salmon tax are difficult to assess. However, what is certain, is that it will slow down future investments in the fish farming industry, that it will lead to structural changes to limit or avoid the negative effects of the tax, and that current owners will consider alternative investments for their capital.

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