Norway: Norwegian Budget 2016: Corporate tax cut and transfer pricing changes post-BEPS
On October 7 2015, the Norwegian government presented the 2016 Budget to parliament. The key tax proposals in the 2016 Budget relevant for foreign corporate investors are as follows:
The corporate tax rate would be reduced from 27% to 25%;
The net interest deduction limitation rules that were introduced with effect from 2014 would be amended so that net interest paid to related parties would not be deductible to the extent the total net interest expense exceeds 25% (currently 30%) of earnings before interest, taxes, depreciation and amortisation (EBITDA), based on tax figures;
One element of BEPS action 2 (neutralising the effects of hybrid mismatch arrangements) would be adopted – the Norwegian participation exemption for dividends would not apply to the extent the distributing entity is entitled to a deduction for the distribution; and
The treatment of certain acquisition and sales costs would be clarified. According to Norwegian tax law, acquisition costs must be capitalised. To the extent the costs relate to shares covered by the Norwegian participation exemption method, the costs will never be deductible. The same is the case for costs incurred by the seller in connection with the sale of such shares. It has been unclear whether costs incurred to acquire or sell such shares should be treated the same way in cases where the acquisition or sale fails. It is proposed that such costs would be non-deductible to the extent they relate to shares covered by the Norwegian participation exemption method.
Tax white paper
The white paper presented by the Ministry of Finance is a follow-up to the Scheel advisory panel's report from 2014. The white paper does not contain any proposed wording of specific sections in the Tax Act, but rather discusses what the main content should cover. It is supplementary to the Budget and looks at possible future actions. Public consultation will be held on the proposals before a concrete law is presented to parliament, and tax law changes would not be implemented before 2017 at the earliest. The main proposals are the following:
The corporate tax rate would be further reduced to 22% by 2018;
The domestic interest deduction limitation rules would be extended to apply to interest paid to third parties. The related commentary is in line with the recently published final report on BEPS action 4 (interest deductions and other financial payments);
The introduction of withholding tax on interest and royalties would be considered; and
Rules implementing a number of other measures in line with BEPS actions would be introduced
Implementation of BEPS actions 8 to 10
BEPS actions 8 to 10 on transfer pricing will take immediate effect in Norway the moment they are formally adopted by the OECD council, as the Norwegian Tax Act section 13-1 refers directly to the OECD guidelines. Moreover, the actions can be seen as clarifying interpretations of article 9.1 in the OECD and UN model tax treaties. As article 9.1 can be found in most Norwegian tax treaties, actions 8 to 10 could also be considered to take immediate effect under this view. To the extent the changes can be interpreted as only being clarificatory in nature, they could potentially be given effect also for earlier years, similar to the possible retroactive effect of clarifying changes to the model tax treaty through the OECD commentaries. It remains an open question, however, as to whether the Norwegian tax authorities will apply this in practice.
Petter Gruner (email@example.com) and Henrik Brødholt (firstname.lastname@example.org)
Tel: +47 23 27 91 65