Eni Norge AS was a wholly owned subsidiary of Eni International B.V., a Dutch company. Both companies were part of the Eni Group, which was headquartered by the Italian company Eni SpA.
Eni Norway had deducted costs related to the purchase of “technical services” from Eni SpA.
Following an audit, the tax authorities reduced these deductions in accordance with Section 13-1 of the Tax Act (arm’s length provision). As a result, Eni Norge’s income was increased by NOK 32,673,457 in FY2015 and NOK 16,752,728 in FY2016.
The tax assessment issued by the tax authorities was later confirmed by a decision of the Petroleum Tax Appeal Board. The Tax Appeal Board found that there were price differences between the internal hourly rates for technical services and the external hourly rates. The price differences could be due to errors in the cost base and/or lack of arm’s length in the allocation of costs.
Eni Norge applied to the District Court for a review of the decision based on a previous decision of the Norwegian Supreme Court HR-2020-1130-A (the Shell R&D decision).
The District Court issued its decision in September 2023. It did not find, that the decision of the Appeals Board was based on incorrect facts or an incorrect application of the law and upheld the decision.
Eni Norge AS then appealed to the Court of Appeal.
Judgment
The Court of Appeal dismissed Eni Norge’s appeal and upheld the tax authority’s assessment.
Excerpts in English
“The Court of Appeal cannot see that it is not possible to determine the arm’s length price for the services between ENI and Eni SpA without viewing the transactions in the context of the onward charge to the licence recipients. It is stated in the OECD Guidelines, para. 3.9 of the OECD Guidelines states that this alternative method should be used ‘when it is impractical to determine pricing for each individual product or transaction’. In the Court of Appeal’s view, there are no particular difficulties associated with distinguishing and valuing the various services provided by the parent company. ENI has ordered all the services provided, and these have been invoiced separately with reference to the orders. The relationship between ENI S.p.A. and ENI Norge is regulated in a separate co-operation agreement, ‘Service agreement’. Under the agreement, ENI has all the rights and obligations in the agreement. No rights have been allocated to the other participants in the licence, and the agreement does not state that it has been entered into on behalf of the licence community. According to the agreement, it is also ENI that will order all services and will be invoiced for these, as has been done. The parties have also realised that there are two separate transactions. There is no evidence in either the orders or the invoices that ENI has ordered goods/services and placed them on behalf of the licence community. Furthermore, there is no difference in the treatment of services that the Appellant has not passed on to the licence community and services that have been passed on.
The hourly rates claimed by ENI S.p.A. from the licence participants are charged to the joint account in gross amounts and the transactions are accounted for as separate transactions in different general ledger accounts. During the assessment process, ENI has provided somewhat different information about which time rates are used. During the Oil Tax Office’s processing of the case, ENI submitted two sets of hourly rates: a set of hourly rates for transactions between ENI and the parent company and a set of hourly rates that form the basis for the output charge to the licence partners. The Complaints Board found that the licence partners were charged a different hourly rate than the hourly rate charged to the Appellant by Eni S.p.A. The Appellant has changed its explanations about this during the hearing of the case. The lack of clarity surrounding this issue indicates that two transactions are involved, although this is not decisive for the Court of Appeal’s assessment. Taken together, these factors support the view that there is no necessary connection between the costs incurred and the charges made on the licence partners.
Real considerations also favour treating the transactions as two separate transactions and that they cover the entire purchase of services. The tax law consequence is that ENI can deduct the entire purchase, but must recognise the payments from the licence partners as income. This arrangement allows the tax authorities to control the entire transfer pricing, which is of great importance for the taxation and management of the state’s petroleum resources. The solution ENI wants will reduce the authorities’ ability to control the transfer pricing of services between the companies and thus entails a risk that income will be evaded from taxation under the Petroleum Tax Act.
Based on an overall assessment, the Court of Appeal has come to the conclusion that the assessment should not take into account the part of the costs that have been passed on to the licence partners. The majority of the Appeals Board and the District Court’s application of the law on this point is correct.”
“It is ENI that conducts the extraction of oil and gas on the Norwegian shelf in its capacity as operator. This activity clearly falls within the scope of Section 5 of the Petroleum Tax Act. The consideration paid by licence partners to ENI is directly linked to the extraction activity in that they pay their share of the costs associated with extraction. The remuneration from the licence partners is thus directly caused by ENI’s activities as operator on the field. In addition, the payments are anchored in the cooperation and accounting agreement that regulates the relationship between the licence holders and the operators. According to the Court of Appeal’s assessment, there is therefore no doubt that the income falls under the special tax obligation in the Petroleum Tax Act.
The appeal has therefore not been successful. Pursuant to Section 20-2, first paragraph, of the Dispute Act, ENI is ordered to cover the State’s costs in the case. ….”
Click here for English translation.
Click here for other translation