Optimal adaptations to thin-capitalisation rules : the case of the Norwegian petroleum sector
Abstract
The high marginal tax rate of 78 per cent in the Norwegian petroleum sector gives the
petroleum companies a strong incentive to finance themselves by both external and
internal debt. This can lead to situations where the companies are financed largely by
debt relative to equity, also referred to as thin capitalisation. Because the interest
expense on debt is tax deductible, extensive use of debt reduces the petroleum
companies’
taxable
income substantially. As the tax from the petroleum sector accounts
for
over
half
of
the
Norwegian
State’s
total
revenue
from
the
petroleum
sector,
different
rules have over time been put in place to reduce the problem of thin capitalisation.
There have been three different thin-capitalisation rule regimes with the first one being
introduced in 1994. In this thesis, we elaborate on the three regimes and develop three
corresponding
theoretical
models
that
describe
the
petroleum
companies’
optimal
capital structure under each regime. We find that under the 1994 regime, the derived
optimal capital structure implied that all companies should have a debt-to-asset ratio of
at least the defined threshold using both external and internal debt. After the
introduction of the second regime in 2002, we find that petroleum companies should
have either the same capital structure as under the 1994 regime, or decrease leverage to
below the threshold if the net gain of exceeding the threshold was insufficiently large.
Finally, we find that under the current 2007 regime, the optimal capital structure is
qualitatively similar, but not equal, to the 2002 regime.
In the last part of the thesis, we present some empirical observations showing that the
total-debt-to-asset ratio has increased significantly since 1993 and converges to 90 per
cent by 2007. In addition, there has been a drastic increase in the use of internal debt
since 2005.