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Under the Norwegian Petroleum Tax Act (“PTA”), companies with taxable income can deduct exploration costs. Petroleum companies that do not have taxable income can pursuant to changes implemented in 2005, carry forward their losses with interest, or ask for an annual cash refund of the tax value (78%) of exploration costs incurred in connection with oil and gas activities on the Norwegian Continental Shelf (NCS). An issue with the tax system before 2005, was that it favored established players on the NCS who were in a tax position and who could set off the exploration costs against deductions in taxable income from current production. As oil and gas investments are capital intensive and have a long lead period from investment to production, new players were disadvantaged.
By implementing the changes to the PTA in 2005, the Norwegian State in reality guaranteed for 78% of all investments on the NCS.
Bellona has argued that this constitutes illegal state aid.
The state aid case has received significant attention given the values involved and the fact that it concerns the ownership to oil and gas on the NCS and the EEA-Agreement's relationship to special tax legislation. In the period 2005-2016, the Norwegian State had total a taxable income from oil and gas amounting to NOK 2151,17 million, whereas the reimbursements amounted to NOK 110,4 million.
ESA concluded that the reimbursement scheme is available to all companies on an equal footing and is therefore not selective, which is one of the cumulative conditions for a state measure to constitute state aid.
ESA states that “EEA States are free to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production. Nonetheless, EEA States must exercise this competence in accordance with EEA law.“
When assessing whether the measure is selective, ESA notes that “a measure is selective only if, within the context of a particular legal regime, it has the effect of conferring an advantage on certain undertakings over others, in a different sector or the same sector, which are, in the light of the objective pursued by that regime, in a comparable factual and legal situation.”
When carrying out this assessment ESA normally uses a three-step-analysis. Bellona argued that this analysis was not applicable in this situation because the refund is comparable to a subsidy, but ESA concluded that this must be assessed as a fiscal measure forming part of the Norwegian petroleum tax system, and therefore must be subject to the three-step-analysis.
The first step of this analysis is to identify the reference system. ESA refers to two previous decisions where they concluded that the reference system was the PTA (and not the general tax system). Both Bellona and the Norwegian authorities agree that this is the correct reference system and ESA states that they do not see any reason to depart from its previous practice. However, ESA limits this to the rules of the PTA regarding the treatment of extraction costs for petroleum companies.
The second step is to consider whether the measure favours certain undertakings over other undertakings which, in the light of the objective pursued by that regime, are in a comparable factual and legal situation.
First, ESA assesses whether the measure differentiates between petroleum companies that have exploration costs, but are not in a tax paying position, compared to petroleum companies with exploration costs that are in a tax paying position.
The measure is limited to petroleum companies with exploration costs that are not in a tax paying position. ESA points out that in a net income tax system, a company in a tax paying position can deduct costs from revenues when calculating the tax base. A company not in a tax paying position cannot deduct costs. Hence, other tax accounting techniques such as loss carry forward are made available. ESA states that establishing a generally applicable loss carry forward rule that applies to all companies that are not in a tax paying position does not mean that companies in a tax paying position are discriminated against. ESA also states that this is a tax measure of a purely technical natuture, and therefore does not constitute state aid as long as it is applied without distinction.
ESA also concludes that the annual tax refund does not, by itself, discriminate against companies in a tax paying position. Companies in a tax paying position can deduct the same costs from revenues. Due to the absence of a net loss, the possibility of carrying losses forward is moot for companies in this situation.
The purpose of the annual cash refund is to introduce a cash flow tax element to the petroleum tax in order to achieve equal and neutral tax treatment to of all petroleum companies. It is therefore natural that the cash refund is only applicable to companies not in a tax paying position.
ESA concludes that the companies in a tax paying position are in a different factual and legal situation as they have taxable revenues and the costs, including exploration costs, are already taken into account in the tax assessment by being deducted from the revenues.
Second, ESA assesses whether the measure differentiates between petroleum companies that have exploration costs, but are not in a tax paying position, and petroleum companies which are also not in a tax paying position, but have costs from other phases of extraction (development, production and closure). ESA considers that since exploration is an integral part of petroleum extraction and must be carried out under any production license if production is to occur, the measure does not have the effect of conferring an advantage on certain petroleum companies over others, even if it is limited to the exploration phase.
ESA thus concludes that the refund scheme is not selective.
As ESA concluded that the measure is not selective, there was no need to carry out the third step of the analysis, which would have been to assess whether the reimbursement rule, including the two conditions for the application of it (tax loss position and exploration cost) could be justified by the nature or general scheme of the tax system. ESA states however, that if the measure was selective, it would have been justified by the nature and general scheme of the reference system. As mentioned, the Norwegian authorities are free to decide on the economic policy which they consider most appropriate and, in particular, to spread the tax burden as they see fit across the various factors of production. Tax neutrality is an objective inherent in the petroleum tax system. Therefore the measure would be justified as it seeks to establish tax neutrality, and stems from the nature and general scheme of the system.
ESA consequently concluded that the scheme does not constitute state aid and will therefore not open a formal procedure.
We note that ESA has previously asked questions related to the possibility for a company that has losses carried forward when its exploration activities are terminated, to sell or transfer these losses to another company, or alternatively receive a cash refund. This possibility is not explicitly assessed by ESA in the decision. In our opinion there is no reason for ESA to reach a different conclusion on this, than for the possibility to receive a cash refund or to carry forward.
Bellona may bring this decision before the EFTA court, and apply for annulment of the decision within two months from its announcement. This is however provided that Bellona is deemed to have legal standing, which is uncertain.
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