Norwegian Supreme Court rules in favour of the shipowners

Background
A new tonnage tax regime was introduced with effect from the income year 2007. Under the old tonnage tax regime shipping income was not taxed unless distributed as dividends or at exit of the system. In the new tonnage tax regime shipping income is tax exempt.

Companies that were taxed under the old tonnage tax regime could choose between entering into the new tonnage tax system or exiting the old tonnage tax regime with effect from 1 January 2007. If the companies chose to enter into the new tonnage tax regime, a transitional taxable gain was levied upon entry. At least two thirds of the calculated gain could be deferred using a ‘Settlement account’ and a minimum of 10% of the original balance were to be entered as income each year from the 2007 through 2017.

One third of the tax liability would be waived if an amount equal to the tax on the amount (28% of the one third) were invested in qualifying environmental measures in the future.

The companies that chose not entering into the new tonnage tax regime were fully taxed for deferred taxable income and added values on the tax exempt assets upon exiting the old system.
Some shipowners claimed that the transitional rules which resulted in previous untaxed profits being taxable when entering into the new regime were unconstitutional and brought the case before the courts.

The ruling
The Supreme Court today made its ruling and came to the conclusion that the transitional rules, where the untaxed profits under the old tonnage tax regime became taxable when entering into new tonnage tax regime of 2007, were unconstitutional. The Supreme Court ruling was made with 6 votes against 5. As a consequence of the ruling the tax assessments for income year 2007 were set aside for the companies in question.

Consequences
Tax
The Supreme Court has set aside the tax assessment for income year 2007 for the shipowners in question, without giving any directions on how the untaxed profits from the old tonnage tax regime should be treated from 2007 and going forward. It is therefore, at this moment, not clear what the consequences will be. Potential responses by the Ministry of Finance might be:

• new transitional rules,
• only amend the rules for the settlement account and leave the rules for the environmental fund unchanged (potential FIFO-principle)
  

Implications to dividend distributed based on the accounting profits for 2007, 2008 and 2009 is not clear.

The ruling also raises questions regarding payment of the advance corporation tax for the income year 2009. The first instalment is on Monday, 15 February 2010 and it is not possible to ask for and be granted an adjustment. Such adjustments should typically be granted if the adjustment is significant, cf the Tax Payment Act sec 6-5. By significant it is understood approximately 10% or more of the total payment.

In today’s press conference the Minister of Finance acknowledged that the basis for estimating the advance corporation tax was erroneous, due to the fact that 10% of the settlement account has been included.The Minister further acknowledged that the timing for making adjustments was tight.

Our understanding of his responses on this matter is the following:

• Companies making full payments will receive a
  refund equal the overpayment, including interests,
  but the refund will not be paid until October 2010,
• Companies choosing to make an advance tax
  payment free of tax on the settlement account
  portion may do so without risking any penalties.

The Norwegian Shipowners’ Association has also issued a circular today in which the same position is taken.

However, we recommend that companies choosing to pay a reduced advance corporation tax, inform both the tax office, i.e. the Central tax office for large enterprises and the local tax collector.

The Supreme Court did not comment on the consequences for shipowners that were not party to this case. However, it is likely that all shipowners previously comprised by the old tonnage tax regime will receive the same treatment.

Accounting
Today's ruling in the Supreme Court clarifies that the changes made in the shipping taxation of 2007 were in conflict with the principle of legality. The accounting treatment for income taxes depends generally whether a particular tax rules was substantively enacted on the balance sheet date.

The Supreme Court judgement in February 2010 has an economic effect in 2010, which is reflected in the share price movements today.
The accounting for uncertain tax positions is not specifically regulated under IFRS.

It is unclear which tax rules were in force at 31 December 2009 particularly when the rules where considered by some to be in conflict with the constitution. However there are principles in IFRS for legal disputes where the ruling is received after year¬end. In our opinion based on such an analogy, the consequences of the ruling is that the tax provision is reassessed for financial statements issued after the ruling as an adjusting event for the balance sheet at 31 December 2009.

We also believe that a parallel interpretation of local gaap should be made.

We have not performed a detailed analysis of possible accounting effects of other consequential issues that may arise following the Supreme Court ruling.

Miscellaneous
We will revert to you with updated information on tax consequences and accounting implications once further guidance is published.

The information contained in this page should not be relied on as professional advice Page 2 and should not be regarded as a substitute for advice in individual cases. No responsibility for any loss occasioned to any person acting or refraining from action as a result of material in this publication is accepted by the author or the publisher.