Windfall tax outlined

The government has released a working paper on extraordinary profits tax (windfall tax) that it used in its negotiations with the National Economic Council of the Government (NERV). The finance ministry will now use the document as a basis for drafting a bill. The document proposes to tax extraordinary profits in the energy and banking sectors and, possibly, in fuel production and distribution. Extraordinary profits shall be determined as the difference between the current year’s tax base and the average tax base for the preceding five-year period and shall be subject to an additional tax at 40%, 50%, or 60%.

The released document is the economic basis for the discussion on the introduction of the tax in a situation of a sharp growth in energy prices and overall inflation, as the government is forced to compensate for the high energy prices and at the same time consolidate public budgets. The main criteria for the selection of the sectors were: an increase in profitability in connection with an external shock; a low probability of the tax burden being shifted onto the end consumer; or the state’s low interest in the growth of investment activity in the sector.

Based on the above reasons, the likely sectors for the introduction of the windfall tax are energy, banking and, possibly, fuel production and distribution. Preliminary information by the finance minister indicates that, in the energy sector, the tax should apply to electricity producers, although the document itself does not state this.

Similarly, in the fuel production and distribution sector, the tax should not apply to the sale of fuel to end consumers. Since these activities are usually carried out within a single legal entity or group, this may have to be considered in structuring the tax.
The tax base would be the difference between the current year’s tax base and the normal profit determined as an average for the last five taxable periods. A tax rate of 40%, 50%, or 60% would be applied to that tax base.

The document admits that a retroactive application of the tax would be problematic. We may thus expect that if implemented, the tax will only be effective after the completion of the entire legislative process, i.e., from 2023. However, the final form of the tax and its implementation are subject of further negotiations.

We will keep you informed of further developments of the legislative proposal. 

 

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