4.1.1 Income tax expense disclosed in the statement of profit or loss

The increase in the effective tax rate was mainly attributable to income tax paid by the subsidiary PGNiG Upstream Norway AS.

PGNiG Upstream Norway AS (“PUN”) pays taxes at the rate of 78%. PUN’s activities in the Norwegian Continental Shelf in 2021 (as in 2020) were subject to taxation under two separate tax regimes:

• income tax system (tax rate of 22%);
• the petroleum tax regime (additional tax rate of 56%).

The high tax rate in Norway is linked to a wide range of investment incentives and additional deductions, which PUN used in recent years:

• For instance, the company may apply a high depreciation/amortisation rate (the annual depreciation/amortisation rate is 16.67%) and commence depreciation/amortisation immediately after capital expenditure is incurred. In the year in which capital expenditure is incurred, the company is entitled to charge depreciation/amortisation for the full year, regardless of the date when it was actually incurred.
• The company may benefit from an investment incentive of 5.2% per annum for four years under the petroleum tax regime. The incentive relates to capital expenditure made in the Norwegian Continental Shelf (excluding exploration expenditure) and amounts to 20.8% of depreciable expenditure (over four years). The incentive is deducted only from income taxable with the petroleum tax (56% rate) and does not apply to income tax. If the incentive amount exceeds income generated in a given year, it becomes deductible in subsequent years.
• Total expenditure on exploration activities may be deducted from revenue. If the company does not generate income from which expenditure on exploration could be deducted, it is entitled to the reimbursement of 78% of the exploration expenditure. The funds are returned in cash by the end of the year following the year covered by the tax return.
• Finance costs may be deducted under both taxation systems.
• under the Norwegian tax system there is no time limit within which tax losses should be used, and interest accrues on losses carried forward. The interest rate applicable to such losses is calculated as a risk-free interest rate, net of income tax

These are the basis of the current Norwegian petroleum tax system. Additionally, in 2020 the Norwegian parliament enacted amendments to the tax law to support the oil industry in view of the significant decline in hydrocarbon prices (in 2019-2020) and introduce incentives to invest on the Norwegian Continental Shelf.

The amendments are effective for 2020-2021 and include:

• direct expensing of development capital expenditure incurred under the petroleum tax regime (56%) – in the investment year;
• uplift for the directly expensed investments of 24% of the investment – in the investment year;
• the direct expensing and the uplift apply for all costs incurred in income years 2020 and 2021 and for all expenditure on new projects approved by the end of 2022;
• refund to oil producers of the tax value of losses for income years 2020 and 2021. The refund is paid in bi-monthly tranches, starting from August 2020

These amendments had a significant positive effect on the profitability of development projects in Norway and significantly shortened the payback period. This is due to the fact that PUN is pursuing a very ambitious investment programme and made direct capital expenditure in excess of NOK 2bn in 2021 (the amount includes direct investments, net of cash flows related to the acquisition of INEOS). The amendments have the following effects:

• direct expensing and uplift – with the new tax rules in place, PUN directly expensed the amount of direct development capital expenditure incurred in 2020-2021, and also applied the 24% uplift for the directly expensed investments.
• improved liquidity and reduced cash requirements – total transfers to PUN in 2020-2021 were NOK 1.2 billion as a refund of tax loss.

The amendments also encourage new development investments in Norway. Under the amended regime, the expenditure expensing rules will apply to all new projects initiated between 2020 and 2022. Direct expensing of such investments may be claimed until and including the year of planned production or operation start-up.

In the second half of 2021, the Norwegian authorities announced plans to further amend to the petroleum tax system that may be effective for future periods (after January 1st 2022). The amendments are to include, inter alia, the following:

• direct expensing of development capital expenditure incurred under the petroleum tax regime;
• increase in the rate of oil tax to 71.8%, while recognising in oil tax the accrued income tax (22%) as cost of sales. The change is of technical nature and, consequently, the marginal rate of the petroleum tax is expected to remain unchanged at 78%;
• reimbursement of the tax loss in cash directly to bank accounts of oil companies;
• abolition of the additional investment tax relief. As of the date of the report, these changes had not been approved by the Norwegian Parliament.

As of the date of the report, these changes had not been approved by the Norwegian Parliament