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

In the case of PGNiG Upstream International AS (“PUI”), the tax rate is 78%. PUI’s activities in the Norwegian Continental Shelf in 2016 were subject to taxation under two separate tax systems:

• The corporate income tax system (tax rate of 25%; in 2015: 27%), and
• The petroleum tax system (additional tax rate of 53%; in 2015: 51%).

The high tax rate in Norway comes with a wide range of investment incentives and additional deductions.

• 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 5.5% 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 22% of depreciable expenditure (5.5% over four years; however, for projects commenced before May 2013 the incentive is 30%, i.e. 7.5% over four years). The incentive is deducted only from income taxable with the petroleum tax (53% rate; in 2015: 51%) 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 a company does not generate income from which expenditure on exploration could be deducted, it is entitled to 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 (25%; in 2015: 27%). Tax losses incurred by PUI in earlier years (until 2012), increased by the accrued interest, reduce its current tax expense. Therefore, throughout the entire period of its existence, i.e. starting from its establishment until the end of 2016, the company paid no income tax in Norway.