Economic rent tax in aquaculture - lack of legitimacy

There are fundamental differences between the various industries

The background for taxing economic rent within the various industries is the use of common natural resources that give a profit above the usual level (“net profit”). Whether the resource is limited or renewable, or partly owned by private individuals, is irrelevant to the argument. What is important is that a net profit can be demonstrated based on this natural resource. This is what provides the basis for special taxation.

Both within oil/water/fisheries and aquaculture, a net profit is claimed in several reports that are publicly available (Statistics Norway (Greaker/Lindholt 2022)). Regardless of which parameter is used in the calculations, there is a relatively high net profit in oil and hydropower. Within aquaculture and fisheries, it is more moderate and has not been calculated as positive until the last 5-10 years.

There are several fundamental differences between the basis for net profit within the various industries. For oil/mining/water/wind power/fisheries there is a common feature in that the natural resource itself is a very important input factor for which the users do not pay anything and which belongs to the community. That is the legal basis for a special tax, since the most important input factor is free when using the natural resource.

When it comes to aquaculture, the input factor that can provide a basis for net profit is in reality only seawater. The biology itself (the inventory), which is by far the largest part of the input, is not included in the calculation in the assessment of net profit in aquaculture on which the Ministry of Finance’s consultation memo is based. Here, the starting point is only the relatively low investments in operating equipment required in the offshore phase of the value creation. In this way, an artificially high value is calculated for the economic rent within aquaculture. Both in isolation because you do not take into account returns on what amounts to approx. 90% of total investment in the offshore phase, and in relation to the other industries which get all investments in physical operating assets/inventories included in the calculation. We do not think there is much disagreement within the economic field that the biological risk is the biggest input factor (risk) in fish farming. That is not the price of sea water. This has received little focus in the consultation memo.

The calculation of economic interest/net profit on which the consultation memo is based is distinctly theoretical and uses overall figures from statistics. In the reports to which the consultation memo refers, account is taken of the relatively high risk of capital depletion (7%) and the work effort matches the actual cost relatively well. This is a good and cautious approach, but at the same time it is completely wrong to ignore the inherent risk linked to the biology of salmon/trout. The reality is that it is biological success that, together with a tight supply in the market, has created the calculated net profit.

Therefore, no account is taken of the return on the risk of having fish in the sea. Therefore, the calculation of net profit is fundamentally wrong as we see it. If one had accepted the biomass as an input factor in the calculations (and calculated a high interest rate due to the high risk for this amount), the value of the economic rent would of course have decreased sharply since this constitutes the majority of the investment.

In our view, it is not the actual use of seawater (and area) that gives net profit, which history has also shown us in that it was not a given that it was possible to create a profit before 2012. For that reason, it would be wrong to justify the proposed tax in the use of natural resources.

An economic rent tax on fish farming in the sea could lead to more people considering moving out of the country, or onto land. The costs of using water on land will be a good estimate of the value of seawater as an input factor in fish farming. What the state is doing now is to accelerate this development by using market forces as a tool in the development.

The state’s own role as regulator of the market

It is part of the basis for the industry’s net profit that it was only when the industry overcame the biological challenges linked to disease, sexual maturation, and growth that it was ready for profit.

What is now believed to be the reason for net profit in the years after 2012 (Greaker/Lindholt 2021 p. 16) is the strong demand, which in turn has led to higher sales prices and improved earnings. We believe this is a correct assumption.

In order to understand the net profit, a further decomposition of the reasons for it must be carried out. By assuming that the state’s limitation in production (the offer) has led to price pressure and better earnings, we must remember that this happens at the same time as the net profit is calculated without looking at the biology that makes up the majority of the investment in the sea phase. These two factors work together to make it an input profit in general and neither of them is linked to natural resources.

The state’s role as “market maker” in fish farming is under-communicated for a natural reason, since it is not the state’s primary task to be an active player in the capital market. But it is actually the state in that the state closes the industry through a limited number of permits, and in that the state sells permits.

Insufficient case investigation

The development and discussion after the proposal on economic rent tax in aquaculture was launched on 28 September 2022 shows that the proposal may have a number of consequences that are not described in the consultation memos. The case investigation is therefore contrary to the investigation instructions. Such serious deficiencies cannot be rectified without a new hearing.

The regulatory requirements

The term duty of investigation is generally used to refer to the public’s responsibility to properly investigate matters before a decision is made. The duty to investigate in the case of public legislative decisions, such as that proposed in the consultation memo on economic rent tax, is regulated by the investigation instructions.

The investigation instructions have the following provision on minimum requirements for investigation:

An investigation must answer the following questions:

What are the positive and negative effects of the measures, how lasting are they, and who is affected?

The investigation shall include effects on individuals, private and public business, state, county and municipal administration and other affected parties.

The investigations must also include uncertain effects. The Directorate for Administration and Financial Management (DFØ) has prepared a Guide to the investigation instructions. In the commentary to section 2-1 question 4, it is assumed that uncertain effects must be described, and it is established that: "The assessment of uncertainty can be done either qualitatively or quantitatively. We should also consider whether measures can be taken that can reduce the uncertainty."

Insufficient investigation of negative consequences for values and investments

There are two investigations on the economic rent tax within aquaculture that must be reviewed in an assessment of whether the effects of the measures have been sufficiently assessed.

The economic interest tax was first examined in NOU 2019:18 Taxation of aquaculture activities. Here, the effects of economic rent tax are particularly described in item 7.9 on p. 162 et seq. In this presentation, the main point is that a neutrally designed economic rent tax will not affect operating and investment decisions.

In 2022, the economic rent tax is analysed in the Ministry of Finance’s consultation note Economic rent tax on aquaculture, which was published on 28 September 2022. Here, it is stated at the outset that economic rent “can be subject to a high tax without weakening the companies’ investment intensity". This has been tried to be explained in more detail in item 4.1 of the report.

The consequence of this is that the reports do not provide any description of the negative effects for values and investments in the aquaculture industry in the event of the possible introduction of economic rent tax. The development after the proposal for economic rent tax was launched on 28 September 2022 shows that the reports were wrong when they assumed on a theoretical basis that the economic rent tax would not affect decisions in the aquaculture companies’ operations and investments.

A main reason why the introduction of economic rent tax affects investments and values in the aquaculture industry is that the introduction of the extensive taxation was unexpected for the actors in the industry. After the proposal was put forward in NOU 2019:18, it was rejected by parties that still form a large majority in the Storting. When the proposal was put forward again by the government in the autumn of 2022, this was contrary to what the market had aligned itself with. The Ministry of Finance knew this of course when they wrote their consultation memo.

Based on the investigation instructions, there are two particularly important consequences of the unexpected comprehensive taxation that are not described in the Ministry of Finance’s consultation memo.

1. The investigation does not describe the risk of reduced investments in the aquaculture industry and related industries as a result of reduced company values, reduced expected future income and uncertainty related to the final taxation regulations. As a result of this, the report also does not describe the risk of adverse consequences of reduced investments, for example in the form of lost jobs and reduced activity in the supplier industry.
2. The investigation does not describe the risk of loss of value in the companies in the aquaculture industry. As a result of this, the consequences of such a loss in value are not described either, including that it becomes more difficult for the aquaculture industry to obtain risk capital.

Lack of investigation of negative consequences of standard prices

Both NOU 2019:18 and the Ministry of Finance’s consultation memo also contain proposals that the economic rent tax should be calculated on the basis of a standard price and not on the basis of the actual sales prices. Both reports contain a rationale for using a standard price, but nothing is written about the possible negative effects of a standard price system.

A negative effect of a standard price system is linked to the use of fixed price contracts that set prices for future sales. A standard price entails a risk that taxation of an agreed fixed price takes place on the basis of a higher standard price which is calculated from the time when the fish is actually sold. Such a risk can mean that it is risky to enter into fixed price contracts and that the seller will therefore be reluctant to enter into such contracts. This in turn could have negative consequences for the processing industry’s ability to buy fish, among other things. This risk is not described in the reports, and consequently no assessment has been given of what measures can be implemented to reduce the risk.

Another negative effect of a standard price system is uncertainty related to the tax calculation if fish of reduced quality is sold at a reduced price. In practice, it is mainly production fish that are sold in large quantities at low prices from the aquaculture companies. A general standard price can mean that such sales are taxed based on a much higher price than the one actually achieved. This is also a risk that is not described in the report, and it is also not described what measures can be implemented to reduce the risk of the production fish either triggering completely unreasonable real taxation or, in the worst case, causing the production fish to be destroyed to avoid sales at a loss .

Correction of flaws in the investigations

In our opinion, the research deficiencies described here are very serious. The shortcomings will of course be pointed out by various actors in the consultation round, but this does not remedy a flawed investigation. When the investigation is so flawed, it becomes very difficult to distinguish between consultation inputs which are corrections of shortcomings in the case investigation and consultation inputs which are party submissions from those affected. The flawed investigation can also lead to the hearing bodies not having a good enough knowledge base, which in turn can lead to the Ministry getting an insufficient decision-making basis for its further work with the economic rent tax.

The lack of investigation can therefore only be rectified by the government now reviewing and assessing the consultation input that has been received. If the government still wants to propose an economic rent tax, a new consultation memo must be submitted that contains an investigation that meets the requirements for a duty to investigate. Based on this consultation memo, the parties can then put forward their views.