Optimal adaptations to thin-capitalisation rules : the case of the Norwegian petroleum sector
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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.