A taxing time for Norway8 October 1998
Following the introduction of new tax rules, Norway’s hydro power industry is shouldering a heavy financial burden. Kristin Steenfeldt-Foss* gives a power producer’s reaction to the new system
New Norwegian rules for taxing power pro-ducers were introduced in the 1997 accounting year. The need for such rules became increasingly apparent when the framework conditions were changed as a result of liberalisation of the power market in 1991, which was followed a year later by the introduction of new tax laws for other industrial business, and the transition from a closed Norwegian electric power market to an open Nordic market.
The intention of the change-over was to ensure equal treatment of all taxpayers, irrespective of their line of business, the form of organisation, ownership and the manner in which it is financed.
Statkraft is Norway’s largest producer of hydroelectric power, with an average annual production of 33TWh, or almost one-third of the country’s total electric power production capacity. In 1997 Statkraft had revenues of NOK6297M (US$800M) and a pre-tax profit of NOK1277M (US$163M). Furthermore, the company’s total tax and levies burden in 1997 amounted to NOK1565M (US$200M), which makes it Norway’s largest land-based taxpayer.
It is quite understandable that the government wants a share of the relatively high profits generated by the Norwegian power industry, and collecting extra taxes or duties is easy. But heavy Norwegian taxation is not compatible with Statkraft’s vision. Statkraft intends to be one of the leading Northern European energy companies, and if this vision is to be realised, it is important that its ability to expand internationally is not impaired.
The Norwegian power plant taxation comprises four types of tax, and as is it formulated now it is extremely complicated. The types of tax are:
•Ordinary company tax (state and municipal income tax).
•Municipal natural resource tax.
•Resource rent tax.
•Municipal property tax.
With the exception of ordinary company tax on profits, all other taxes are calculated for each individual power plant. In the case of the natural resource tax and property tax, where power plants encompass a geographic area involving more than one municipality, taxes have to be split between the municipalities or county municipalities in question. The effect of this is that Statkraft pays tax to 101 different local authorities.
The value of operating assets for tax purposes in the opening balance on 1 January 1997 was an important aspect when calculating taxes, and was solved in Norway by the public regulatory authority, the Norwegian Water Resources and Energy Administration. This was given the task of fixing the replacement costs for all power plants, based on technical information provided by all power companies. This work was started as early as 1996, and continued way into 1998.
Natural resource tax
The natural resource tax is intended to ensure that regional municipalities, where the power plants are located, receive a minimum income, irrespective of the power plant’s financial result. The tax rate is fixed at NOK0.012/kWh (0.15cents/kWh), and is calculated on the average of the plant’s production in the last seven years. This tax is, like the previous power plant taxation, not profit-linked.
The natural resource tax is to be co-ordinated with the govern-ment’s share of company tax (common tax on profits) in that any assessed natural resource tax which exceeds the taxpayer’s assessed common tax for the accounting year can be carried forward and offset, with interest, against common taxes in later years. When the natural resource tax rate is as high as it is now, this means higher taxes for those players in the Norwegian market that have low profits and who cannot offset all the natural resource tax.
Resource rent tax
The resource rent tax represents a tax on the part of the income of the individual power plant that exceeds a ‘normal’ return.
Resource rent is defined as the extra return generated because one has at one’s disposal a resource that is in short supply, ie water. The resource rent tax is calculated on the basis of a calculated resource rent income, on which tax is levied at the rate of 27%. The starting point is an assessed income based on the individual plant’s production hour by hour, multiplied by the spot price in the corresponding hour. An exception from the spot market price is made for licence power, power supplied on long term contracts over seven years or more, lease agreements and power consumed in the company’s own activities.
The plant’s actual operating expenses and depreciation for tax purposes are deductible. Before arriving at the resource rent income, one deducts tax-free income, which represents a normal return. The tax-free income is arrived at by multiplying the power plant’s net asset value for taxation purposes by a norm rate. A 27% resource rent tax is paid on this resource rent income.
The resource rent is calculated for each power plant, and it is possible to carry forward any negative resource rent against future positive resource rent in the same power plant. This means that it is not possible to offset negative and positive resource rent tax between the different power plants.
The rules governing property tax for the power industry are new, and property tax under the new tax regime will be payable for the first time in 1999. Property tax amounting to 0.7% of the estimated market value of each power plant will be levied. The net asset value is fixed as the present value of cash flow from operations, reduced by the present value of future replacement costs of operating assets at each individual power plant.
Power revenues that are included in the calculation are fixed in the same way as the resource rent tax, in that an assessed income is fixed for the hour by hour spot prices multiplied by the production in the respective hours of the year, with the same exceptions as for the resource rent tax. In the case of property tax, however, a five-year average of assessed income is to be applied.
The Norwegian power sector has two important objections to the new tax system.
Firstly, the system is not sufficiently profit-dependent, and compared with other countries, the tax level being applied to the Norwegian power industry is significantly higher. The resource rent tax that has been adopted by Parliament represents a special tax on the Norwegian power industry, and is thus a disadvantage in an open Nordic power market. In the long term this will result in the financial status of Norwegian players being much weaker than that enjoyed by foreign players.
Furthermore, the tax rules that have been passed are extremely complicated, and the authorities are experiencing problems in wording regulations that can be practised in real life, and in building up adequate competence within the taxation authorities to allow them to exercise the necessary control.
Compared with the other Nordic countries, Norwegian taxation of power plants is extremely high. Taxes and duties/levies on production in Norway in 1997 amounted to around NOK0.06/kWh (0.77cents/kWh). Sweden and Norway are the only countries with special taxation of power producers, and in Sweden the power producers pay a special property tax in addition to ordinary company taxation, but the level is significantly lower than in Norway. Sweden reduced its property tax in 1998, and the total burden of special taxes on production in 1997 was about 40% of the Norwegian level.
In Finland, power producers pay only ordinary company tax on profits and normal property tax on real estate. In Denmark, most of the power producers are organised as co-operatives, and by being consumer-owned they are not subject to taxation.
During the 1990s, a common Nordic electricity market has developed. It started with liberalisation in Norway in 1991, while corresponding legislation was implemented in Finland in 1995 and in Sweden in 1996. These countries, together with Denmark, which is less liberalised than the other Nordic countries but which will go further than the EU Commission’s planned liberalisation, now make up a common Nordic market.
The consequences of major differences in the tax and duty/levy level between the different countries are paramount to the industry. The Norwegian power industry must face open competition and a market that is becoming increasingly integrated, while at the same time shouldering a special Norwegian taxation policy as an extra burden.
As more players are gradually becoming interested in investing in the Norwegian market, it is important that there are Norwegian players with the necessary financial strength.
With the players operating under such different framework conditions, Statkraft is interested in levelling the taxes between the countries, and in separating Norwegian regional policy from power plant taxation questions.
|A municipality’s story|
|Åseral municipality in Norway is one of the ten wealthiest in the country, measured by the number of inhabitants. All of those municipalities listed in this ‘top ten’ have one thing in common — they take in huge tax revenues from hydro power production, and some have income bases up to 13 times the national average. The municipalities also have a small number of inhabitants. Åseral, for example, only has about 870 inhabitants. Rune Stokke, chief executive at Åseral, explained that taxes are set at a national level and are not a muncipality’s decision. Åseral has five hydro power stations in its municipality, all of which have a high power output. Stokke explained that Norwegian hydro power producers have always paid high taxes. ‘The taxes are not to chastise hydro in any way or discourage construction of new hydro stations,’ he said. ‘It’s just that the tax system is taxing sections of industry which have the potential to earn very high incomes. We are very fortunate in our municipality as about 99% of our power production comes from hydro, and these stations are earning high incomes. ‘Consequently, we do receive substantial revenue from hydro taxes but we are very dependent on this money. As we get quite a large income from the taxes we, as a municipality, do not get as much funding from the state compared with municipalities which have fewer or non hydro power facilities.’ The following amounts are estimates of how much money Åseral receives from hydro power taxes each year: •Licence tax. Åseral receives NOK4M (US$0.5M) per year from licences which permit companies to build power stations. •Municipal natural resource tax. When a hydro power company produces 1B kW of hydroelectricity, Åseral will receive NOK10.5M (US$1.3M) in taxes. •Licence power. All hydro power companies must also save some power, usually 10%, for their municipality to use. This is really compensation for the use/loss of rivers. With plants which were built before 1959, the municipality must pay the company how much it costs to produce the power. With those constructed after 1959, the state will decide how much the municipality must pay for the power. Most municipalities take up this opportunity to buy the power. Some sell it directly to local people but Åseral sells it on the open electricity market to make as much profit as it can. Åseral usually receives about NOK1.5M (US$0.12M) a year from this. •Property tax. At the current rates Åseral receives NOK10M (US$1.3M) per year from taxes on hydro power plant buildings, tunnels and associated roads owned by hydro plant operators.|