Go to content

Newsletter - Still no decision from ESA on Bellona’s state aid complaint on the the rules on reimbursement for exploration costs

EFTA Surveillance Authority has still not decided whether or not to open a formal investigation on the Norwegian rules on reimbursement for exploration costs. After a letter from the Norwegian Authorities in February this year, ESA was expected to reach a decision by summer. However, a letter from Bellona in May led to further questions from ESA, which were answered by the Norwegian Ministry of Finance 29 August. Based on signals from ESA, a decision might come in the fall of 2018, but there is no guarantee.


EFTA Surveillance Authority (ESA) has, due to a complaint from Bellona, for the last year considered whether or not to open a formal investigation of the rules on reimbursement for exploration costs because they might involve illegal state aid. The process has been rather extensive, and the Norwegian authorities have submitted two formal letters to ESA in the case already (of 22 September 2017 and 8 February 2018). The latest development in the case is a letter from ESA of 18 June with further questions from ESA, prompted by a letter from Bellona 28 May 2018. This was answered by a letter from the Norwegian Ministry of Finance on 29 August 2018.

In their letter of 28 May 2018, Bellona argues that the reimbursement must be viewed as a subsidy, and not a tax measure. Bellona also emphasises the lack of similar schemes in other EEA/EU jurisdictions. Furthermore, Bellona argues that the explicit and exclusive derogation from the pledging prohibition for the exploration reimbursement scheme only, also serves to underline the fact that the scheme in its form and content is not a tax advantage, but rather a subsidy.

For the sake that ESA finds that the reimbursement is a tax measure, Bellona agrees that there is probably basis for considering the petroleum tax system as such as a separate reference system. However, they argue that the reimbursement scheme entails a derogation from this system. A rather extensive description of the facts is provided, in order to support the argument that there is no reason to differentiate between exploration activities and other activities/costs. It is for instance pointed out that there are a number of petroleum companies undertaking exploration activities exclusively. Illustrated by the development of the activity on the NCS, there is in Bellona’s view reason to claim that exploration activities undertaken by non-taxable companies are favoured as compared to exploration activities undertaken by taxable companies. This cannot be justified by the nature and general scheme of the system. Bellona therefore holds the scheme to involve unjustifiable selective advantages regardless of whether or not it is regarded a tax measure.

As a consequence of this letter, ESA sent a letter to the Norwegian authorities in which they requested answers to five specific questions related to the letter from Bellona. Furthermore ESA also opened for submitting comments on any other information and/or allegation about unlawful aid brought up by Bellona.

The Ministry of Finance’s letter is extensive and thorough. The letter starts by giving a brief overview of fundamental features of the Norwegian petroleum activity and the petroleum tax system in order to clarify the facts. Further the Ministry elaborates on the arguments previously presented that this measure is not state aid. Finally, the Ministry provides answers to the specific questions posed by ESA.

The petroleum tax system (PTS)

In the letter, the Ministry describes the different phases of the production licenses, and the nature of the petroleum companies’ activities. It is explained that exploration is an integrated and necessary part of all petroleum activity and that a production license covers all phases of petroleum activity, not merely connected to exploration, development or the production phase. The Ministry has also included a description of the companies active on the Norwegian continental shelf (NCS) today and the structure of the Norwegian petroleum industry in order to demonstrate that it is not the companies, but rather the production licenses that reach the specific phase of petroleum activity.

Bellona inter alia claims that changes in the company structure on the NCS illustrates “the effect of a provision favouring exploration activities undertaken by non-taxable companies over both exploration activities undertaken by taxable companies, and over other activities governed by the Norwegian petroleum tax system regardless of tax position.” The Ministry states that they disagree with Bellona on this point as the changes in the industry structure on the NCS cannot be explained by one factor alone. Moreover, favouring certain activities or companies is not an explanation factor, as the amendments in the PTS led to equal tax treatment of companies on the NCS.

The Ministry furthermore underlines the objective of the PTS and stresses that the main objective is to secure the state high revenues from the petroleum activity without distorting the companies’ decisions. A neutral tax system requires symmetrical treatment of costs and income, i.e. that all costs can be deducted against the same rate as the income is taxed. A neutral tax system will not hinder economic profitable activities, and does not affect commercial decisions.

The Ministry states that a neutral resource rent tax can be designed as a cash flow tax, with immediate deductions of both operating costs and investments. A cash flow tax in its purest form may include an annual pay-out of the tax value of losses (costs). Alternatively, a neutral resource rent tax may be an accrued (periodic) tax where the capital expenses are depreciated over a longer period and deduction of costs first becomes effective when the taxpayer is incurring income. A neutral accrued tax must include features that compensate for the time value loss following from waiting compared to immediate deduction. Such compensation is given as an adequate interest rate on investments and unused losses, keeping the real value of deduction over time. A neutral, accrued tax must also give the taxpayer certainty for the full value of all tax losses in the future. As the ordinary tax system, the Norwegian PTS is based on the accrual principle. For exploration costs, a cash flow element is also introduced, i.e. the annual reimbursement rule. The introduction of the reimbursement rule equalised the treatment of companies in a tax loss position and a tax position, with regard to the timing of deduction for exploration costs.

Finally, the Ministry explains how the companies’ tax positions are determined. The PTS is a net income tax system, i.e. all relevant costs are deductible before arriving at the tax base. The petroleum activity on the NCS is taxed on a consolidated level (not field-by-field taxation). Hence, a petroleum company can deduct costs related to one license from income related to other licenses. The company’s tax base for the petroleum activity in the income year is the sum of the income and costs from the total petroleum activity. A company’s tax position in a specific income year will therefore depend on the result in the different production licenses the company holds in that year.

State aid assessment

The Ministry has argued, and still argues that reimbursement for exploration costs does not constitute state aid and that the PTS is the relevant system of reference when evaluating the rules of reimbursement of the tax value of exploration costs under the State Aid rules in the EEA Agreement. The Ministry’s response, and argumentation, is based on this premise and is in line with the arguments previously presented by the Ministry.

No advantage

The Ministry argues that the reimbursement does not confer an “advantage” within the meaning of the State Aid rules. The introduction of the reimbursement rules did not imply an advantage for specific companies (companies in a tax loss position) or costs (exploration costs). Rather, the effects of the general schemes under the PTS – the right to carry forward losses with interest and the reimbursement of the tax value of losses when petroleum activities are terminated – ensure the same net present value of tax payments for all petroleum companies and all kinds of costs.

The reimbursement rule for exploration costs introduced a cash flow element in the PTS with annual reimbursement of the tax value of such costs. The effect of the reimbursement rule is the difference in timing of tax deductions for exploration costs, i.e. at what time the state covers the tax value through the PTS. Assessing the potential economic benefit of timing effects can best be done in present value terms. This approach is in line with economic theory of evaluating economic effects of different timing of payments as it takes into account inflation, risk and opportunity costs. The reimbursement rule provides for a different timing of deduction for exploration costs. However, the rule does not alter the real value of costs or the level of risk covered by the state. In a situation without reimbursement, a company would carry forward its losses until it runs a profit or it decides to leave the NCS (receiving termination reimbursement). The real tax value of deduction for exploration costs would in both cases be upheld by interest. In other words, the reimbursement rule implies that the company receives an amount today, instead of receiving, with certainty, a higher amount in the future. Thus, the reimbursement for exploration costs does not favour companies in a tax loss position compared to companies in a tax paying position, but rather ensures equal timing for deduction of exploration costs for all companies. Hence, there is no effect in present value terms.

Not selective

The Ministry submits that the reimbursement rule is, in any event, not selective. In order to assess whether a tax measure is materially selective, it follows from consistent case law, that a three-step analysis is usually applied. The Ministry is of the opinion that this case is no exception in that regard.

ESA’s questions of 18 June 2018

Finally, the Ministry provides answers to the ESA’s questions. The first two questions were related to the exemption from the general prohibition of tax pledging pursuant to the Tax Payment Act for these reimbursements. Bellona argues that this shows that this is not a tax claim. The Ministry rejects the argument that the annual reimbursement of exploration costs is not “in its nature” a tax element. And states that the claim for reimbursement of the tax value of exploration costs is an integrated part of the PTS and a genuine tax element. The Ministry holds that the fact that an exemption from the general rule for tax claims in the TPA was required, underpins that the claim for reimbursement of the tax value of exploration costs in its nature is a tax claim.

ESAs third and fourth question relates 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. ESA asks whether these possibilities apply also to companies in the development or production phases. The Ministry confirms that the possibility to sell or transfer a tax loss to another company when the petroleum activity is sold, or when two petroleum companies are merged applies to all petroleum companies. Thus, it applies irrespective of the phase of the production licenses and company’s petroleum activity. A petroleum company may purchase the shares of another petroleum company, or purchase the petroleum activity as such from another petroleum company. The Ministry also explains how the rules on transfer of tax loss works for these situations and that they apply to all petroleum companies, irrespective of the phase of the production licenses and the company’s petroleum activity.

In ESAs final question it is stated that the annual cash refund applies only for exploration cost of companies in the exploration phase, not for companies active in the development or production phase. In this context, from a selectivity (fiscal) analysis perspective, ESA asks for detailed information as regarding the comparison of non-taxable and taxable companies in the exploration phase and Comparison between non-taxable companies in the different phases. The Ministry deems this question to be answered in their letter’s state aid assessment.