Norway – Proposals for Corporation Tax reformNorway tax

On December 2, a tax commission charged with examining the tax system in Norway submitted its report 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.

Your Tax Office 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.