Newsletter no 5/2009 - Tax

Publisert: 2009-10-27 09:52

On 13 October 2009, the Government presented its proposal for the National Budget for 2010.

As expected, the budget contains few significant proposals for revisions of business and industry taxation, but there are inter alia proposals on changes regarding valuation of dwelling and business property which has not been let out. The Ministry of Finance also proposes to follow up some of the recommendations from the Tax Evasion Committee (“Skatteunndragelsesutvalget”), presented in its report earlier this year.

Below is a further description of the most important, proposed changes:

1       PROPOSED CHANGES RELATED TO REAL PROPERTY

In the National Budget, new rules are proposed for determining the value of dwellings and business property which has not been let out.

1.1     Valuation of dwelling

New rules are proposed to be introduced for the valuation of residential properties for net wealth tax purposes. The new system is a formula-based system, whereby the sales value will be determined based on the type of house, size, year of construction and geographical location. The value is to be determined by the Tax Authority based on information from the central property register for the Tax Authority (referred to as “SERG”) and other property registers, but must be supplemented by further information from the tax-payer.

The system will not apply to recreational properties/holiday houses, business properties, farmhouses or properties abroad. As appears from item 5 below, a major increase in the tax-free allowance has been proposed for the assessment of net wealth tax.

As to the type of dwelling, it is proposed to distinguish between detached houses (one –family house) small houses (two-family houses and semi-detached houses as well as terraced houses) and block apartments (building with at least two floors, at least three apartments and often a common entrance). The system shall further distinguish between the so-called primary homes (the registered address of the tax-payer) and the second home (any other dwelling). The value of the primary dwelling will be set at 25% of the formula-based sales value, while the equivalent percentage for the second dwelling will be 40%. The so-called “safety valve”, which implies that a dwelling shall not be valued higher than 30% of the fair market value, will be continued, however, to the effect that the maximum limit for a second dwelling is set at 60%. Fair market value shall, as today, be documented for example by appraised value.

As to the size of the dwelling, it is proposed to use the P-ROOM (primary rooms) as measurement for the floor space. Up until 1 January 2008, BOA (gross dwelling area) was the most commonly used indication of area at a sale of a dwelling. For a transitional period it will be accepted that the reported space of the dwelling is indicated as BOA instead of P-ROOM. The P-ROOM will in many cases be somewhat less than the BOA, and thus, it may be of interest to the taxpayer to use the indication of P-ROOM area for reporting purposes. The floor space system shall be based on the first square metre of the dwelling being valued higher than the last ones.

Determination of the construction year of the dwelling shall be based on a classification in four groups: Dwellings up to 10 years old, from 10-19 years old, from 20-34 years old and dwellings older than 34 years. The construction year will be the year the dwelling was completed.

The system is further based on a differentiation pursuant to geographical location. Basically, each municipality will be a separate zone. In some of the urban municipalities a further division into zones has been suggested, in order to take into account the price difference between the various districts. In Oslo, the various districts (“bydeler”) will probably be separate zones. In other municipalities the number of dwellings sold may be too low to form basis for a formula. In such cases, several municipalities may be considered as one zone.

It is further proposed that the new valuation system also shall apply to valuation of dwellings in housing corporations (housing cooperatives and condominiums).

As mentioned above, this system shall not apply to recreational properties/holiday houses. Instead, the tax-assessed values of recreational properties will be increased by 10%. A new feature is that it is not the use, but the characteristics of the property that is decisive for whether it is considered to be a recreational property. Recreational properties will typically be cabins, summer houses and condominiums built exclusively for recreational purposes. An all year residence used as recreational residence will basically be subject to the new rules on valuation (as second house).

Under the current tax limitation rule applicable for some taxpayers, 1.5% of the value of the housing stock exceeding NOK 200 000 is added to his/her ordinary income. It is proposed that a primary dwelling shall not be subject to such additional tax.

1.2     Value assessment of not-let commercial properties

New rules have been proposed for the valuation of not-let commercial properties pursuant to a formula-based system.

New rules effective as from the income year of 2009 were adopted for let commercial properties, and the Ministry does not propose any amendments to these rules. The new formula-based rules are intended to give a significantly better correlation between the tax-assessed value and the fair market value compared to the current system, and the proposal will imply that the economic value of not-let properties to a greater extent will correspond to the economic value of the let commercial properties.

The Ministry proposes that the tax authorities, based on the data reported and calculation of let commercial properties, shall determine a square metre rate based on information on de facto rental income, type of property, floor-space and location. The Directorate of Taxes shall prepare rates per square meter, differentiated according to location and type of property (property category), and the intention is to prepare a somewhat rough system which will take the annual variations of rent within each property category into account. Basically, the property categories shall be fixed, but it is possible that some changes may be made.

The floor-space of the relevant commercial property shall be multiplied by a differentiated square metre rate according to property category, and the tax-assessed value will be set at 40% of the basis of calculation. Similar to what applies to the let commercial properties, a “safety valve” system is being introduced, to the effect that the determined tax-assessed value as a maximum will amount to 60% of the property’s fair market value.

In order to obtain sufficient information on floor-space, location etc. regarding not-let property, it is proposed that a separate form determined by the tax authorities be prepared for the purpose of reporting such information.

The formula-based system will be applicable for commercial properties that pursuant to its nature fall under the scope of application for the method for valuation of let commercial property, that is, all types of commercial properties, including office premises, factories, land, parking houses, stores, workshops, etc. will be encompassed. Residential housing, recreational properties and agricultural properties, forests and power plants fall outside the scope of application.

The new rules are proposed to take effect as from the income year of 2010. A regulation with rules on determination of square metre rates and property categories shall be submitted for review in the spring of 2010. It is proposed that the Directorate for Taxes shall determine the square metre rates for each property category for the relevant income year pursuant to the method stipulated by the regulation.

1.3     Changes to the rules on taxation of unit holders in newly established companies

The National Budget refers to the fact that housing cooperatives are no longer themselves in charge of the actual construction of houses. In order for the unit holders to be subject to the same tax system as owners, it is proposed to repeal the special provision in the Act on Taxation on allocation of income, etc. for these unit holders.

The repeal will entail that it is no longer a requirement that at least half of the dwellings must be completed as per 1 January of the fiscal year in order for the unit holder to be allocated the housing cooperative’s revenues and assets. A consequence hereof is that interests on debts no longer can be accumulated, but are deductible from the year each unit holder has taken possession of his apartment. The change will also entail that the unit holder may, as from take-over, enter the tax-assessed value of the dwelling as wealth and be entitled to a full deduction of debt.

The Government will consider whether it is necessary to implement transitional rules for settlement related to accumulated income pursuant to prevailing rules. It is proposed that the Ministry be granted authority to adopt transitional rules by way of regulation. The rules are proposed to take effect as from a date decided by the Ministry, but the goal is that the rules shall take effect as from the income year 2010.

 

2       THE SHIPPING TAX REGIME – PROFIT AND LOSS ON CURRENCY HEDGING CONTRACTS

Companies comprised by the shipping tax regime are operating in an international market and may have income and costs in various currencies. In order to hedge against exchange rate fluctuations, the companies may enter into currency hedging contracts. In the current shipping tax regime, profit and loss on currency hedging contracts are comprised by the companies’ finance income subject to ordinary tax (i.e. 28% tax).

In the proposition the Ministry stresses that currency hedging contracts normally will be closely associated with the companies’ tax-exempted shipping activities. Hence, it is proposed to amend the rules entailing that profit and loss on currency hedging contracts shall be divided between the companies’ tax-exempted shipping activities and taxable finance income. The allocation shall be made pursuant to a distribution formula, which to a great extent corresponds to what today applies to profit and loss following foreign exchange fluctuations on receivables and liabilities in foreign currency, as well as interest on debts. The amendment of the rule entails that only the share of the profit or loss that corresponds to the ratio between the company’s finance capital, as entered in the balance sheet, and the total capital will be liable for tax or tax-deductible.

The objective of the amendment of the rule is to increase the flexibility for the shipping companies with respect to hedging against foreign exchange fluctuations. The legislative amendment is proposed to enter into force for currency hedging contracts being concluded as from 1 January 2010.

 

3       FOLLOW-UP OF THE TAX EVASION COMMITTEE’S RECOMMENDATIONS

In 2007, the Government appointed a Tax Evasion Committee, who presented its recommendation in NOU 2009:4 “Measures against tax evasions” on 24 February 2009. The recommendations have been presented for general review, and the Ministry of Finance proposes to implement some of the proposed measures. It is further notified that proposals suggested by the Committee, but not put forward in this proposition, will be considered later.

3.1     Proposal for refusing to allow deductions pursuant to the Taxation Act and the VAT Act for costs exceeding NOK 10 000 not paid through a bank

It has been proposed that the right to deduction pursuant to the Taxation Act and the right to deduct input VAT pursuant to the VAT Act be excluded if transactions exceeding NOK 10 000 are not being paid through a bank or through an institution that pursuant to the Financial Institutions Act is entitled to conduct payment transfers.

As there is a requirement for identification of payer and payee, not every means of payment in which a bank is involved as party to the payment order will be considered to fulfil the condition, and the Ministry will by regulation stipulate further rules as to the types of payment that fulfil the condition of “payment through bank”.

The proposal is not intended to restrict the right of deduction when a balance is settled through set-off.

In order to allow the business and industry time to adapt to the new regime, the rules are suggested to be effective as from 1 January 2011.

3.2     Proposal for joint liability for buyer of services in the private sector when the purchase amount exceeds NOK 10 000 and the buyer has not settled the amount through a bank

If a buyer of services does not pay through a bank, and the purchase amount exceeds NOK 10 000, it is proposed that the buyer shall be jointly liable for tax and VAT, evaded by the person rendering the service. The liability may also apply in connection with purchase of goods along with services, but not for a strict purchase of goods.

The proposal implies that on certain conditions, private individuals may be held liable for the service provider’s evasion of tax and VAT, regardless of whether the buyer knew or should have known about the evasion.

The further rules will be stipulated by regulation, and it has been proposed that the new rules will not take effect until 1 January 2011.

3.3     Other proposals

The Ministry of Finance has proposed the following changes based on the Recommendations from the Tax Evasion Committee:

• The Customs are granted authority to impose an infringement penalty for breach of the duty to declare currency and other means of payment exceeding NOK 25 000. The penalty for infringement may be imposed by up to 30% of the non-declared amount.
• Økokrom’s access to convey information received through money laundering notifications to the Tax Authorities will be extended
• The duty of due diligence and loyalty that currently follows from tax assessment practice and legal practice shall be laid down in the Taxation Act. A similar provision shall be included in the rules pertaining to determination of customs and excise.
• It will be established by law that the two year respite for changes in the tax assessment shall not apply in the event of omission to inform on errors in the tax assessment or the tax settlement.

4       REPORTING AND DOCUMENTATION REQUIREMENTS FOR COMPANIES AND ENTITIES HAVING CONTROLLED TRANSACTIONS AND OUTSTANDING ACCOUNTS WITH PUBLIC OWNERS

With effect from 1 January 2008, comprehensive reporting and documentation requirements were introduced for controlled transactions between privately owned companies and entities. It has now been suggested that these rules be extended to also comprise companies and entities that are party to transactions or have outstanding accounts with county municipality or municipality that directly or indirectly owns or controls the company or the entity by 50% or more. It is emphasised that the reporting and documentation requirement only shall be imposed on the one who is party to the transaction or the outstanding accounts, and that the county municipality and the municipality shall be exempt from the requirements. When determining the ownership and control, the same rules that are applicable for privately owned companies shall be applied.

The Ministry has concluded that there is not the same need for control of transactions between the Government and state-owned entities, and suggests that the extension be limited to private entities owned by the county municipality or the municipality.

The rules are proposed to become effective immediately, in order for the reporting requirement to be applicable as from the income year 2009, while the documentation obligation shall apply as from the income year 2010.

 

5       OTHER AMENDMENTS OF THE TAXATION RULES

5.1     Business taxation

• Exemption from the employer’s social security contribution obligation is suggested with respect to remuneration to foreign employees on foreign ships in connection with petroleum activities on the Norwegian continental shelf and in Norwegian territorial waters. This will inter alia apply to foreign employees working on special vessels, such as supply ships, diving vessels, heavy lift/crane vessels and vessels for seismological explorations.
• In 2006 it was decided to reintroduce the system of tax allowance for allocation to joint capital for certain cooperative entities. The goal of this revision was to improve the basic conditions for the equity of the cooperative entities. However, the entry into force was postponed, pending approval from EFTA Surveillance Authority (ESA). On 23 July 2009, ESA passed a resolution stating that the deductibility was not in conformity with rules on state subsidy pursuant to the EEA Agreement. The Government decided not to bring the case before the EFTA Court of Justice, but await pending procedures before the European Court of Justice and the European Commission concerning cooperative entities in Italy. For this reason it has been proposed not to repeal the provision on allocation to jointly owned capital.

5.2     Personal taxation

• The allowance for trade union contribution, as well as employed people’s deduction for union dues to certain professional and trade organisations, is proposed to be increased by NOK 60 to NOK 3 660.
• To ensure equal treatment with respect to pension agreements pursuant to prevailing law on individual pension schemes (IPS) and former arrangement with individual pension agreements pursuant to the Taxation Act (IPA, it has been proposed that also lump-sum payments under the IPS agreements shall be taxed as personal income. This change implies that both current payments and lump-sum payments under such agreements are to be considered as personal income. The payments will be subject to social security contribution by low rate (3%), and will not be considered as pensionable income pursuant to the National Insurance Act.
• The lower threshold for surtax shall be adjusted for estimated wage growth from NOK 441 000 to NOK 456 400 for level 1 and from NOK 716 600 to NOK 741 700 for level 2. The rates remain unchanged, 9% for level 1 and 12% for level 2.
• The upper limit for the standard allowance of personal income will be increased from NOK 70 350 to NOK 72 800. For pension income, the standard allowance will be increased from NOK 58 900 to NOK 60 950.
• The tax allowance on personal income will be increased from NOK 40 800 to NOK 42 210 for tax class 1 and from NOK 81 600 to NOK 84 420 in tax class 2.
• The maximum allowance for paid trade union contribution will be increased from NOK 3 600 to NOK 3 660.
• The system whereby employees can pay for their own PC via a tax-free deduction from their pre-tax pay will be discontinued. No changes will be made to the tax exemption for private use of equipment funded by the employer.
• A significant increase of the threshold for municipal and governmental wealth tax has been proposed. While the threshold is NOK 470 000 for this year, the proposal implies that for 2010, the threshold will be NOK 700 000.

 

6       CHANGES REGARDING VALUE-ADDED TAX

• The Government proposes some adjustments that limit the broadening of VAT on cultural events, compared to the proposal from the Committee appointed to assess VAT treatment of cultural and sporting services, by deciding that admission to concerts, music festivals, opera and theatres shall continue to be exempt from VAT, while admission fees to exhibitions in museums and galleries, as well as admission to amusement parks and adventure centres will be subject to VAT. It is further proposed that the most professional segment of the sporting sector will be subject to value-added tax.  This will inter alia apply to people running health clubs and golf courses, as well as the most professional part of sports that has a great audience appeal and a large income from gate-money. In order to allow the affected players to express their opinion to the proposed scheme, the plans will be submitted for another review. The Government intends to present a bill in ample time for the Parliament to pass the enactment, with its entry into force as from 1 July 2010.
• The Government proposes to allocate NOK 200 million to a new compensation scheme for value-added tax for voluntary organisations. It is proposed that the scheme is effective from 1 January 2010.