Ernst & Young: Norway leading way in North Sea tax reform
The Norwegian Ministry of Finance's proposed tax reforms look promising for international oil and natural gas companies already doing business in Norway and enhance Norway's attractiveness for new international investors, said Ernst & Young LLP energy and tax expert Derek Leith.
In an interview with OGJ from his Aberdeen office, Leith called the proposed changes "more sweeping than the piecemeal reform of the UK system that has taken place over the last few years."
He said, "Not only will gains realized on the sale of shares by companies be exempt from taxation, but also dividends received by companies will no longer be liable to tax. The UK introduced an exemption for gains in 2002, but [the UK] still taxes dividends received from nonresident companies."
Unlike UK taxes, the Norwegian proposals have no minimum holding period or minimum percentage ownership requirements, Leith explained.
Norway tax reforms
Norway proposes that, as a general rule, dividends and gains on shares derived by companies shall be exempt from tax, government documents indicated. In addition, the tax rules are aimed at eliminating discrimination against foreign owners or foreign shares.
Currently, dividends and capital gains from foreign shares are taxed more heavily than dividends and capital gains from the shares of Norwegian companies.
"In an integrated international economy, particular attention must be paid to ensuring that the tax system makes it attractive to work, invest, and operate business in and from Norway," a government white paper said. "The Norwegian tax system should be simple, predictable, and provide a good general framework that reinforces economic growth."
Derek Leith
Ernst & Young LLP head of oil and gas taxation
Norway's proposed tax changes are "more sweeping than the piecemeal reform of the UK system that has taken place over the last few years."
The tax reforms, which are expected to be approved by the Norwegian parliament, are slated to be effective from Mar. 26, and the exemption of dividends from taxes will be effective retroactive to Jan. 1, Norway's Ministry of Finance said.
Norwegian North Sea
Norway is "very desirous of opening up" to gain more investment, Leith said, adding that Norwegian officials particularly seek more oil and gas investment.
"If you look at an overall context of oil and gas being such a significant portion in gross domestic product, you need to have a well-exploited oil and gas sector. It seems to me that they need to get new investment. I suspect the tax changes are going to be an integral part of what they want going forward," Leith said.
The Norwegian sector of the North Sea is much less mature than the UK North Sea sector, he noted.
"There is a lot of opportunity still there. But there have been problems for Norway. One is the extreme high tax rate of 78% for oil and gas companies," Leith said. Norway has a standard income tax rate of 28%, plus an additional 50% income tax for oil and gas companies, Leith said.
"There has been some lobbying from the oil companies in Norway for changes to the special rate that applies to oil and gas companies. It has been suggested that the 50% tax rate applying to oil and gas ought to be cut in half. But as far as I am aware, there is no draft legislation to do that," he said.
Another issue for international investors is that Norway can prove to be a difficult region to enter for non-Norwegian companies, he said. "A lot of opportunities in Norway are in the hands of Norwegian companies."