Norway – Proposals for tax reform; maritime industry considerations

December 2:  A tax commission charged with examining the tax system in Norway today submitted its report—NOU 2014: 13—to the Minister of Finance that describes proposals for changes to the corporate tax system and for adjustments to the tax system, in general.

The tax commission’s report will be submitted for public consultation.

Background

The tax commission was appointed by the previous government (Stoltenberg II) in March 2013 and was directed to review the corporate tax system in light of recent trends in international taxation.

In November 2013, the current government (Solberg) broadened the commission’s mandate and directed the commission to assess Norway’s tax depreciation rules.

Recommendation for reduced corporate tax rate

The tax commission reviewed the Norwegian corporate tax system in light of recent trends in international taxation, and its recommendation is for a reduction in the statutory corporate income tax rate to 20% (from the current rate of 27%).

Noting that many countries have statutory corporate tax rates lower than 20% or have favorable tax regimes for certain types of income, the tax commission recommended a reduction in the statutory corporate tax rate to be combined with other measures to counter profit shifting.

KPMG observation

The scope for adopting such measures could be limited by Norway’s international obligations, primarily under the EEA Agreement. Moreover, Norway’s right to taxation would, in some instances, be limited by the 90 tax treaties that Norway has concluded with other countries.

Corporate tax proposals

The key corporate tax proposals from the tax commission’s reports would:

Reduce the statutory corporate income tax rate to 20% (from 27%)

Narrow the tax deductions for interest costs further—i.e., to 45% of earnings before interest and tax (EBIT) and applicable to all interest costs (related-party and external interest costs)

Increase the taxation of shareholder income (dividends and capital gains)

Introduce a withholding tax on interest and royalty

Repeal a withholding tax on dividends (except dividends distributed to low tax jurisdictions)

Amend the depreciation rules

Introduce a value added tax (VAT) for financial services

Countering profit shifting

Generally, the tax commission’s view is that Norway needs to follow up any recommendations concerning the arm’s length principle resulting from the base erosion and profit shifting (BEPS) project within the OECD.

The proposal for a reduced corporate income tax rate would decrease the profitability of profit shifting abroad. However, in the tax commission’s view, it could be difficult to find good arm’s length prices in certain areas—such as with respect to royalties, rental payments, and interest—so that special rules would need to be considered, such as:

Introducing a withholding tax on interest

Introducing a withholding tax on royalties (including rental payments for certain tangible assets)

Treating Norwegian registered entities as always being tax residents of Norway

To counteract tax planning through the use of hybrid arrangements, restricting the exemption method by excluding dividends when the distributing company has been granted a deduction in respect of the distribution

Broadening the taxpayer disclosure requirements (including foreign ownerships)

Requiring that tax returns be filed electronically

The tax commission’s position is that there is a need for taxation to address profit shifting, to prevent double non-taxation, and to determine Norway’s right to such income.

Special consideration for bareboat leasing

It was noted that the Norwegian tax base faces significant costs and challenges related to the leasing of vessels, machines, and assets—especially within the offshore petroleum sector. According to the tax commission, it is not an unusual practice for offshore contractors to lease assets from related parties (i.e., that are residents outside Norway). Generally, such lease payments are considered deductible for tax purposes in Norway. According to Norwegian tax authorities, the tax deduction for bareboat leases was BNOK 20.1 in 2011 and BNOK 16.6 in 2012, mainly related to offshore drilling rigs.

The tax commission discussed whether to introduce a deduction limitation in respect of royalties (to include bareboat lease payments), but concluded that a general limitation would not be a good resolution. Nevertheless, the tax commission’s position is that the Ministry of Finance needs to consider a deduction restriction for tax purposes in connection with certain types of rental payments, including bareboat charters on vessels and rigs.

The tax commission referred to UK law that imposes a cap on the tax deduction available for bareboat leasing payments for rigs (i.e., with respect to the UK continental shelf) made to a related party. However, the Norwegian tax commission did not recommend adapting the UK model when the limitation for tax deductibility is based on historic costs of the rig.

Rather, the tax commission recommended that:

The Ministry of Finance consider special rules that would limit the tax deductibility of bareboat lease payments related to rigs.

A limitation on the tax deductibility would apply to bareboat lease arrangements between related parties and based on a “template based market rate.”

The Ministry of Finance needs to consider whether income from a bareboat lease of vessels would be excluded from the Norwegian tonnage tax system so that a withholding tax could also apply to bareboat vessel charters that, by definition, fall under the Norwegian tonnage tax system (but the withholding tax would have to be redesigned so that it does not conflict with EEA law).

KPMG observation

The tax commission’s report is silent with regards to further analysis and the potential timeframe for adopting these proposals set out in the report. Nevertheless, tax professionals in Norway believe that the Ministry of Finance is already working on rules that would limit the tax deduction on bareboat payments between related parties.

Depreciation of vessels and rigs

The tax commission’s view is that the depreciation rules, to the extent possible, must correspond to the economic life; and therefore, the report proposes a reduction to the current depreciation rate for vessels and rigs to 10%, from the current depreciation rate of 14%.

Special tax regimes

The tax commission did not propose changes to the special tax regimes for petroleum and hydropower companies, and it may be assume that revenue from these regimes would remain unchanged. However, it may be possible that a reduced statutory corporate tax rate could be countered by increasing the special tax for petroleum companies and economic rent tax on hydropower.