As in other OECD-countries, protecting the domestic tax base whilst at the same time reducing the statutory corporate tax rate in order to stay internationally competitive, is a main concern for Norwegian lawmakers. The OECD BEPS project is also generating activity by the Ministry of Finance and the tax authorities. An additional factor of complexity is that the Norwegian tax regime – in spite of having no formal say in EU rulemaking – has to be EU/EEA compliant, in particular in relation to the freedoms of establishment and movement of capital.
The tax rate has been reduced in increments from 28% in 2014 to 24% in 2017. The government has signalled a reduction to 23% in 2018.
The tax base has effectively been broadened by way of changes in tax law as well as more stringent and competent enforcement of existing rules. Overdue changes implementing rules that are common in other comparable tax regimes have been proposed. The net result is a progressively more comprehensive and complex tax regime, with the planning opportunities and pitfalls such regimes entails.
Main material changes are:
- Interest deduction
Interest deduction limitation rules between associated parties was introduced in 2014. EFTA Surveillance Authority (ESA) in 2016 issued a reasoned opinion that the rules constitute a restriction. A recent proposal seeks to address this issue and to widen the scope of the limitation to include interest payments to third party lenders. For international groups the proposed limitation would not apply to the extent the company can demonstrate that the equity ratio is at least equal to the consolidated group equity rate. Another exemption applies to Norwegian consolidated sub-groups. Net interest cost must surpass MNOK 10 for the limitation to apply. All interest surpassing 25% of a tax adjusted EBITDA is limited if the company is subject to the limitation rules. The proposed rules may increase the taxpayer compliance burden significantly, particularly for groups that do not report in IFRS, but also due to certain requirements to obtain auditor confirmation. The changes are expected effective in 2018.
- Transfer pricing
The Ministry of Finance has signalled that they expect the tax authorities to apply BEPS concepts such as increased focus on substance and reallocation of profit due to functional analysis also to assessments of tax years prior to 2017. Hence, taxpayers may benefit from reviewing filed documentation for earlier years for evaluation of BEPS compliance, particularly in the areas of substance and value chain analysis.
Possible future changes:
- As a follow up to a 2014 tax reform review, the Ministry of Finance in whitepapers has proposed a number of changes, particularly in relation to international activities:
- Withholding tax
Presently, only dividend payments to foreign recipients may be subject to a withholding tax of 25%. Withholding tax on interest, royalty and bareboat payments may be introduced, possibly at a reduced rate. The main potential impact is for structures that involves low tax countries without a comprehensive tax treaty with Norway. Already, restructurings involving EU/EEA resident companies is in the works by advisors and international groups in order to prepare for possible changes.
- Tax residence of companies
Presently a company incorporated in Norway but effectively managed abroad is deemed not to have a Norwegian domicile. The proposed changes make such companies domiciled in Norway. Also, foreign companies that are effectively managed in or from Norway shall be deemed tax resident. Changes in the tax code may result in a company not having a Norwegian domicile where a tax agreement is in force. Implementation is expected in 2018.
- Controlled Foreign Company (NOKUS)
The Norwegian CFC rules may be subject to review in 2017. Present outbound structures that provide deferment of Norwegian tax should be reviewed in light of possible changes.
Transfer pricing compliance
The present transfer pricing documentation rules are expected to be subject to revision, likely in 2018. Already the BEPS influence on the documentation expectation by the Norwegian tax authorities is felt by taxpayers and advisors. The main signals indicate an increased focus on the documentation of substance, where decisions are made, who makes such decisions, functional analysis, risk analysis and value chain analysis. Particular interest lately in tax audits has been immaterial property transactions such as royalty and profit sharing, bareboat payments to tax havens and valuation reports.
To prepare for scrutiny, taxpayers do well in expanding their transfer pricing documentation on BEPS terms, and in particular on substance support and valuation reports. Standard US styled reports with database searches as the main pricing support may not be sufficient to prevent being picked for auditing or the tax filing being challenged. Since written internal agreements are the starting point for the tax auditors review, the documentation should thoroughly demonstrate actual compliance on key points with the agreements.
The MAP instrument has traditionally been handled by the Directorate of Taxes. From 2017, a special unit within the Central Taxation Office for Large-sized Enterprises will handle such requests. This unit has also been tasked with the handling of APA procedures, which previously only was sporadically and non-bindingly applied. Hopefully, this increased focus on MAP/APAs will contribute to a more predictable tax environment for internationals.
The same office is staffing up on valuation expertise. This has already resulted in a much sharper and thorough focus on valuation in tax audits. In particular, valuation documentation must be expected to be scrutinized and will likely require solid documentation and rely on comparable market or third-party data input in order to be accepted.
New tax administration code
A new comprehensive tax administration code was introduced in 2017. In the main the new provisions represent a continuation. As to changes, of particular relevance for international groups is the new reassessment limitation regime, where the absolute reassessment time is 10 years prior to the present tax year in cases where a qualified penalty is warranted, with a 5-year reassessment period (previously 2 or 3 years) in ordinary cases. Consequently, the reassessment exposure is increased, which suggest that the taxpayer should be even more diligent in securing contemporary documentation of relevant facts.