A simple primer on the Norway Resource Rent tax.

Introduction

I’ve had information come across my desk recently, that made me think I need to know more about the Norwegian resource rent tax introduced in January 2023 on seawater aquaculture operations in Norway. This is a continuation in my “simple primer” series of blog posts. If you haven’t already done so, please have a look at last week’s post on sea lice management.

1)        A section of @Dag Sletmo’s Fishy Friday newsletter, provided an overview of amounts paid for Norway seawater production permits. The commentary around the tax at the time suggested it would drive investment away from Norway. It would seem this was not the case as the price paid per license was the highest in the last 5 years.

Norway License Auction - 2024

2)        In a conversation with another colleague, it was mentioned that the resource tax was creating an incentive to invest in post-smolt production, or at least, larger smolts as the calculated production on a farm was harvested fish less smolt/juvenile biomass. Effectively, the larger you went with smolts, the less tax was payable. This was not an earth-shattering revelation, but I realized that I hadn’t given enough thought to the tax and its impact on the salmon industry.

Background to the tax:

Now, I’m not Norwegian and certainly cannot claim expertise in either the Norwegian tax nor political systems but this is my blog and I have certain editorial freedoms, so here we go.

From around 2014, the Norwegian salmon industry was printing money hand over fist and became a ripe target for increased taxation. I don’t know that details of how the tax was conceived, presented etc., but my recollection is that the tax was popular with Norwegian voters. Initial commentary suggested tax rates as high as 45% and salmon companies were not pleased.

Ultimately the resource rent tax was set at 25% and is applied on top of the existing corporate tax of 22%, resulting in an effective marginal tax rate of 47%. On the surface of it, this looks like the kind of tax rate that would erase profitability from most businesses. Given the results of the license auction this year, I think we have a pretty solid indication that industry confidence in long-term profitability remains stronger than ever.

Offsets to the tax:

1)        As mentioned above, the taxable production volume is net of smolt biomass (which was produced on land) creating an incentive to produce larger smolts.

2)        It applies only to volumes produced in the seawater phase – the following were not included:

a.        Other species – only applies to salmonids

b.       Land-based operations

c.        Offshore

d.       R&D licenses

e.        Service providers

3)        There is a tax-free allowance of 70m NOK ($6,6m USD) per group – I’m not entirely sure what constitutes a “group” but does this punish the larger companies?

4)        It is a cash flow tax – companies are allowed to deduct capital purchases in the year in which they are made. As an example, if a farmer purchases a $10m US feed barge for the farm, the entirety of the $10m can be deducted from the tax payable. Under normal accounting rules, an asset like a feed barge would be depreciated over ~10 years and only $1m US per year could be deducted.

5)        The earnings calculations are not based on actual price achievement but are set by a special price board which surveys market prices and sets a standard price to be used in the tax calculations. I’d be very curious to know how the high volume of “production grade” fish produced this year (up to 40% per sources) impacted the calculation of market price. As many readers know, export prices were sky-high for much of the first half of this year but if 40% of your production was sold as discounted production-grade fish, a market-driven calculation would likely penalize struggling producers.

6)        The carry-forward of losses is a bit odd. If the sum of deductions results in a negative tax liability, the amount of the tax credit can only be applied in that year – it cannot be rolled forward to reduce the tax burden in future years. Actual operating losses, however, can be rolled forward indefinitely to reduce tax liabilities in future years. I would be curious to know if a negative tax liability in the resource rent tax could be used to reduce liabilities under the normal 22% corporate tax?

Final thoughts:

Some of the original commentary around this tax suggested it would create an enormous revenue windfall for the Norwegian government – I think those calculations were based on a fairly simplistic 25% applied across volume produced. Given the deductions and technicalities of how the tax is applied, I wonder what the real amount of tax revenue was actually paid? On the surface of it, it seems that companies could develop strategies to greatly minimize their tax liabilities and write off much of their capex spending.

Last year, a comment made by one of the larger salmon producers suggested that not including offshore aquaculture in the resource rent tax scheme would kill investment in the offshore segment. At the time, I didn’t understand this statement but, given the cash flow nature of this tax, companies could write off every dollar invested in an offshore farm. With the high cost of offshore development, perhaps the government was worried that offshore development would effectively negate the revenue from the resource rent tax?

If you are still reading, you are a kind and gentle soul. Feedback/corrections welcome. The opinions contained are mine and, as mentioned above, I am not a tax expert, just a guy who thinks entirely too much about salmon farming.

Best,

Alan