Why has the controversy over excess profits taxes escalated in Western countries?
Global economies have recently witnessed several challenges, starting with the repercussions of the Corona pandemic, through the disruptions of supply and supply chains, and ending with the repercussions of the Russian-Ukrainian war, which contributed to the rise in oil, gas and food prices. Despite the negative repercussions of those crises that increased the suffering of some poor countries, on the other hand, they contributed to increasing the profits of energy, technology and food companies at abnormal levels.
In that context, calls from international organizations and members of civil society rose to impose taxes on excess profits to reduce price gouging and profiteering; The Secretary-General of the United Nations, Antonio Guterres, called for the imposition of special taxes on oil and gas companies, because of their large profits, and the European Commission suggested that the European Union countries impose taxes on the excess (unexpected) profits earned by energy companies, and those demands were supported by some Countries; Spain, Greece, Italy and Britain have already imposed windfall taxes on the profits of energy companies, and other countries, such as Germany, Austria and the United States, are studying the implications of the decision.
growing demands
Excess profit tax An additional tax levied on the profits of corporations or corporations that exceed a specified profit rate. It can be temporary or permanent, and usually aims to offset income inequality due to windfall profits. The introduction of this tax is usually associated with crisis contexts; For example, this tax was proposed to finance the efforts of the First World War, in Denmark and Sweden in 1915, and was later adopted in the United States and France, the British government devoured the British government at a rate of 50% on profits above the normal level before the war, a rate that was then raised to 80% in 1917 to fund economic recovery. During World War II, 22 countries implemented temporary excess profits taxes, with tax rates of up to 100%, and Japan implemented excess profits taxes in 2012 to fund reconstruction after an earthquake devastated its economy.In addition to the foregoing, a trend has emerged in the recent period demanding the imposition of excess profits tax, and this trend has crystallized as follows:
1- Some economists call for tax: During the coronavirus pandemic in 2020, economists Emmanuel Saez and Gabriel Zucman proposed an increased profits tax on companies that benefited from the effects of the pandemic and government enforcement of related public health restrictions; As fears of the disease, in addition to the imposed quarantine, the closure of economic activities, and social distancing measures, harmed many companies and contributed to the high losses, but they contributed to the benefit of some, especially digital services companies, pharmaceutical and technology companies and the electronic retail sector.
2- The discourse of international organizations about the importance of the excess profit tax: in the context of the repercussions of the Russian-Ukrainian war and its contribution to the rise in energy prices and thus the exaggerated increase in the profits of energy companies; United Nations Secretary-General Antonio Guterres has called for special taxes to be imposed on oil and gas companies because of their large profits, and the European Commission has also proposed that European Union countries impose taxes on the excess (unexpected) profits earned by energy companies.
3- European countries move to impose excess profit tax: The British government announced plans to impose an unexpected 25% tax on the profits of oil and gas companies, to pay cash to those suffering from sharply high energy bills. Spain and Italy have already agreed to impose similar taxes, while Polish Prime Minister Mateusz Morawiecki has urged major energy producer Norway to use oil and gas profits to support countries hardest hit by the Ukraine war, especially Ukraine.
In a related context, this issue raised a great deal of controversy within Germany. While many political forces in Germany supported the decision to impose the tax, especially from the Social Democratic Party and the Green Party, which was prompted by the sharp increase in gas prices in Germany in recent weeks; The Federal Ministry of Finance, and especially the Ministry of Economy, opposed such a tax, as did the Confederation of German Industries, on the grounds that it already taxed high profits, and that it would harm innovation and investment in the industrialized nation.
4- Introducing tax bills in the United States: Representative Peter DeFazio introduced a bill that would impose a one-time 50% tax on excess profits for the largest oil companies for 2022. Senator Bernie Sanders introduced a proposal for a 95% tax that would apply to profits The excess of all large companies – in all sectors not only in the oil sector – and defined as companies generating revenues of more than $500 million, in 2022 through 2024.
Senator Sheldon Whitehouse of Rhode Island and several other Democrats introduced the Oil Unexpected Profit Tax Act. Technically, a tax is imposed not on profits but on the increase in the price of oil sold, whether locally produced or imported. The revenue collected will go towards rebates sent to consumers. Then the largest American oil companies, which represent 30% of the market, will be subject to tax; This will make it difficult for them to pass the tax to consumers through higher prices.
boosting factors
Claims for the necessity of imposing taxes on the excessive profits of energy companies increased due to a number of main factors represented in the following:
1- The increase in the profits of oil companies: The Russian-Ukrainian war contributed to the rise in energy prices to high levels; Which led to higher profits for energy companies. The combined profits of four energy companies – Exxon, Chevron, Shell and Total – amounted to nearly $51 billion during the second quarter of the current 2022, which is almost double what they achieved in the corresponding period last year. Then there were calls for new corporate taxes to be imposed on these excessive profits, and for the money to be used to support the most vulnerable.
2- A severe global food crisis worsens: nearly 200 million people face hunger, with the Horn of Africa, Afghanistan and Yemen hard hit; Severe weather conditions, including the worst droughts in 40 years in the Horn of Africa, the fallout from the pandemic and the disruption of supply chains caused by the Russian-Ukrainian war have combined to deepen the global food crisis. As a result, many countries have exhausted their food reserves, and there is not enough funding to address the immediate rescue needed. Thus, the windfall tax was introduced as a tool to ease the cost-of-living crisis for the poor in developed countries and exacerbate hunger in the developing world.
According to Gabriella Bucher, global head of Oxfam, “Food, fossil fuel and pharmaceutical companies have made plentiful profits during the Corona virus epidemic, and therefore excess profits must be taxed as a surprise tax, that would generate resources for each of the most affected populations in the countries most affected.” wealth and enable the fulfillment of aid obligations; The imposition of an unexpected 90% tax on excess profits worldwide would generate about 490 billion dollars that could be used to solve the food crisis, which is heading to catastrophic levels.
3- Escalating multinational corporation tax coordination policies:The OECD concluded the Multinational Corporation Tax Agreement on July 10, 2021, with a consensus of 137 countries. It calls on states to agree to dismantle current digital taxes that the United States considers discriminatory, and to refrain from similar measures in the future. It aims to create a global minimum tax of at least 15% for companies with a turnover of more than 750 million euros, and is based on two pillars: Pillar One – a 25% tax on excess profits (more than 10% of profitability) for companies with a turnover of more than 20 billion euros, and the revenue from this tax measure will be redistributed among the countries in which these companies operate; That is, if these companies achieve at least one billion of sales there, or 250 million if the GDP of these countries is less than 40 billion euros, a decision that targets the 100 most profitable companies in the world that alone generate half of the world’s profits, including Companies with digital activity such as “GAFAM, Google, Apple, Facebook, Amazon and Microsoft”.
The second pillar is the establishment of an effective minimum tax rate of 15% on profits of companies with a turnover of more than 750 million euros. The OECD’s apportionment solution may reduce, but not eliminate, the tax advantage of multinational corporations. Then it’s time to impose the third pillar: a global COVID-19 excess profit tax.
4- Providing additional resources for economic recovery: The trend in favor of imposing the excess profits tax believes that this tax helps provide additional resources to finance the economic recovery and cover some of the costs of the epidemic, more efficient than increasing the corporate tax rate that will be applied over the next few years, or increasing personal income taxes that affect decisions about working time, spending, and saving. It is also expected that the excess profit tax on oil and gas companies will add new revenues ranging between 5 billion and 35 billion dollars; Where the excess profits tax is designed to have the additional profits made; Because of the estimation of potential tax revenue gains for external events.
5. Produce better prospects for public spending: Compared to consumption-based taxes, an excess profits tax will stimulate higher prices for essential goods and services, redistribute huge profits, reduce the financial and market power of excessively profitable firms, and raise revenue to pay for key public services.
major challenges
There is still controversy over the idea of imposing an excess profits tax; Proponents of the idea want to deduct excess profits from companies, while critics believe that this deduction is an arbitrary measure that can cause companies to reluctance to innovate, and may lead to high rates of inflation. In this context, the application of the excess profits tax faces some challenges represented in the following:
1. Constitutional and legal challenges: Imposing new taxes will face major legal barriers; The German constitution, for example, provides an exhaustive list of the forms of taxation that the legislator is permitted to introduce, and does not allow the addition of a new form of taxation or the combination of several forms of taxation in a new hybrid tax system; To avoid uncertainties regarding legislative and administrative competencies or the distribution of tax revenue between different levels of state in Germany, such as a nuclear fuel tax that has been found to be unconstitutional.
2- Unequal treatment of taxpayers: The introduction of a new form of sector-specific taxation will lead to unequal treatment of taxpayers, which must be justified with good reason; To be consistent with the principles of law in some countries, such as Germany, and could lead to potential problems with state aid. The European Commission has already indicated that there could be implications for government aid if these increased profits taxes lead to selective benefits for specific projects.
It is noted here that some describe these taxes as unequal; Recent calls are calling for the tax to be applied to energy companies, given that they profit from the rise in oil and gas prices as a result of the repercussions of the Russian war, despite the rise in profits of companies in other sectors during the Corona pandemic; Including technology companies, pharmaceutical companies and electronic food, and therefore the tax framework is unfair if it is imposed on the excess profits of oil and gas companies only, but must be circulated to all companies benefiting from the pandemic and war.
3- Increased opportunities for tax evasion: The excess profits tax, like any other tax, is subject to tax evasion; The excess profits tax can encourage multinational corporations to implement tax evasion schemes, such as acquiring loss-making companies or shifting profits to tax havens.
4- Shifting the tax burden to the consumer: These new forms of corporate windfall taxes in the energy sector could conflict with the Harmonized System of Excise Duties on Energy Products; Business owners can pass on any increased tax burden to workers or consumers.
5. The negative impact of increased tax uncertainty on investment: Although an excess profits tax may appear economically efficient in theory, it may not be so in practice; The imposition of the tax may create uncertainty about the future tax system; Perhaps not only for oil and gas companies, but for other sectors. Thus, future investment spending by oil companies is reduced, and the imposition of an unanticipated tax in one jurisdiction may result in changes in location to avoid such taxes.
6- Decreased pace of green investment: Given the imperatives of combating climate change and providing energy security, the energy sector is particularly important. Declining profits, whether in excess or not, may deter the pace of investment in renewable energy and slow the transition to increased energy security. The imposition of an unexpected tax leads to some short-term gains, which may be offset by long-term losses.
Supplementary Policies
In that context, the International Monetary Fund called on global economies to stop trying to control the rise in food and energy prices and focus their goal on protecting the most vulnerable groups; Where countries should aim to allow domestic prices to follow international prices, rather than imposing unexpected temporary taxes on energy companies that are being discussed in some countries, permanent taxes should be imposed on the excess profits of those companies, as an economic rent in excess of the required return By investors, it would enhance social cohesion and could become a source of significant revenue that would contribute to reducing existing economic distortions.
This requires that excess tax revenue must be used together with auctioned recycled revenue from the EU’s emissions trading system to create a support package for citizens. The package should include direct payments to consumers and measures to improve energy efficiency; Which will reduce the impact of higher prices in the short and medium term, with the need to move from the tax rules for companies based on the origin to the tax rules based on the destination, so that all companies are taxed at their sales destination, eliminating the economic distortions that arise from fake transfer prices and shelters tax and tax planning; Each institution will be positioned to be more economically efficient, thus contributing to a more fair and efficient global tax system.
By Hoda Said – Interregional for Strategic Analytics
