Tackling base erosion and profit shifting
The Norwegian Government proposes changes to the rules on interest limitation and corporate tax residency. The proposals will curb profit shifting and base erosion and level the playing field for national and multinational businesses.
The interest limitation rule restrains multinational groups’ ability to reduce corporate income tax in Norway by excessive debt financing of Norwegian subsidiaries.
“Multinationals can shift profit out of Norway and thereby pay less taxes. Purely domestic companies do not have the same possibilities, which makes the competition unfair. When we restrict profit shifting strategies, we are levelling the playing field and at the same time securing the tax base. Curbing profit shifting is also crucial to preserve the legitimacy of the corporate tax system,” says Siv Jensen (The Progress Party), the Norwegian Minister of Finance.
The Norwegian tax legislation already has a rule that limits highly leveraged companies’ deduction for interest paid to related parties. The deduction is capped if net interest exceeds 25 per cent of taxable earnings before interest, taxes, depreciation and amortization (EBITDA), and if net interest exceeds a de minimis threshold of NOK 5 million.
Multinational groups can also shift profit by placing excessive amounts of external debt in countries with high or normal tax levels, like Norway. The Government therefore proposes that the interest limitation rule should also limit deduction for interest paid to independent parties. The new amendment only applies to companies in a group.
“This proposal is an important step in implementing the OECD’s BEPS recommendations,” Ms Jensen says, referring to the OECD and G20’s project on reducing base erosion and profit shifting (“BEPS”). “Several EU countries are now implementing similar tax rules to comply with EUs Anti Tax Avoidance Directive.”
The de minimis threshold in the new rule is increased to NOK 25 million in net interest. This means that groups with total net interest in Norwegian companies of less than NOK 25 million are not affected by the changes. A proposed escape clause will allow full deduction of interest paid to independent parties if the equity ratio of the company equals or exceeds the equity ratio in the group’s consolidated financial statements. The purpose of the escape clause is to keep ordinary business loans that are not part of a profit shifting strategy from being affected by the limitation.
The Government proposes that certain adjustments to the accounting numbers have to be made when calculating the equity ratio. The escape clause may be applied on company level or, alternatively, on a “national” level by calculating a consolidated equity ratio for the Norwegian companies of a group. Purely domestic groups will by definition fulfil the conditions of the escape clause and will thereby always be able to fully deduct interest paid to third-parties, for example to banks. There is no risk of profit shifting in the form of strategical allocation of third-party debt within a purely domestic group.
“A high de minimis threshold and an escape clause based on companies’ equity ratio make the rule more targeted towards profit shifting and strategic allocation of third-party debt,” Ms. Jensen says.
The Norwegian Ministry of Finance expects the proposal to increase annual tax revenues by NOK 600 million in the short-run.
“In the long-run, the proposal is important to secure the tax base and to create a level playing field for multinational and national businesses,” Ms. Jensen says.
The Government also proposes amendments to the corporate tax residency rules. The proposal is based on a proposal from a Commission appointed to review the corporate taxation in Norway. The aim is to address tax avoidance strategies and to ensure that companies with sufficient connection to Norway are deemed resident in Norway. The proposal implies that companies incorporated in Norway and foreign companies performing effective management in Norway will be deemed resident in Norway and liable to pay tax on their worldwide income. However, a company resident in another state under a tax treaty will not be deemed resident in Norway.
The new BEPS-measures in the 2019 National Budget are part of the implementation of the Government’s proposed tax reform (Report to the Storting No. 4 (2015–2016) Better Taxation – A Tax Reform for Transformation and Growth) and the parliamentary agreement of May 2016 on a tax reform.