The petroleum tax act and investment distortions : did the norwegian petroleum tax system become more or less distorted after the reduction of uplift in 2013?
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In light of Sandmo’s (1989) definition of neutrality, the objective of the thesis is to measure investment distortions in the Petroleum Tax Act (PTA) before and after the reduction of investment uplift in May 2013. The study relies on one unified model and applies two different approaches, where the model is based on the research conducted by Lund (1987, 1992). Neutrality is analysed from a governmental point of view with a contingent claims analysis (CCA). This method is consistent with the neutrality properties of Boadway and Bruce (1984) and Fane (1987). Thereafter, neutrality is evaluated from a petroleum industrial perspective applying a discounted cash flow (DCF) method. The effect of the reduced uplift is analysed for a firm outside tax position and a company in tax position. Investment distortions are illustrated by comparing the neutrality properties of the PTA, against the neutral Brown cash flow tax and the Norwegian General Tax Act. The results show that if companies apply a CCA, they have incentives to overinvest. After the reduction of uplift, the incentives to overinvest have been reduced, and tax revenue has increased. In contradiction, if firms outside tax position use a DCF method the PTA gives incentives to underinvest, and the effect on tax income is uncertain. For a company in tax position, the DCF results show that the PTA is relatively neutral and tax income has increased after the reduction of uplift. This implies it is an advantage to be in tax position, creating barriers to entry from an industrial perspective. Based on these results, we find it likely that the PTA has become more neutral and tax income increased after the reduction of uplift.