On September 14, 2022 as follow-up to the State of the Union Address form the President of the European Commission, Mrs. Ursula von der Leyen, the European Commission released a Proposal for a Council Regulation on an emergency intervention to address high energy prices. The purpose of this Regulation is to establish an emergency intervention to mitigate the effects of high energy prices via exceptional, targeted and time-limited measures. These measures aim to reduce electricity consumption, to cap the market revenues that certain producers receive from the generation of electricity and redistribute them to final customers in a targeted manner, to enable Member States to apply public interventions in the price setting for the supply of electricity for households and small and medium-sized enterprises, and to establish rules for a temporary solidarity contribution for EU companies and permanent establishments with activities predominantly in the oil, gas, coal and refinery sectors to contribute to the affordability of energy for households and companies.
In this article we will focus on the proposed regulations for a temporary solidarity contribution for EU companies and permanent establishments with activities predominantly in the oil, gas, coal and refinery sectors to contribute to the affordability of energy for households and companies.
A few important definitions in this respect
With respect to the solidarity contribution the proposal for a Council regulation gives amongst others the following definitions:
- ‘fiscal year’ means a tax year, calendar year or any other appropriate period for tax purposes as defined in national law;
- ‘activities in the field of oil, gas, coal and refinery sectors’ means any economic activity performed by an EU company or permanent establishment generating at least 75% of turnover in the field of the extraction, mining, refining of petroleum or manufacture of coke oven products;
- ‘surplus profits’ means taxable profits accrued from activities carried out at the level of companies or permanent establishments in the field of oil, gas, coal and refinery sector above a 20% increase of the average of profits of the previous three tax years;
- 'solidarity contribution’ means a temporary measure intended to address surplus profits of EU companies and permanent establishments with activities in the field of oil, gas, coal and refinery sectors to mitigate exceptional price developments in the energy markets for Member States, consumers and companies.
MEASURE CONCERNING THE OIL, COAL, GAS AND REFINERY SECTORS
Article 13 - Support to final customers through a mandatory temporary solidarity contribution
- Surplus profits generated from activities in the oil, gas, coal and refinery sector shall be subject to a temporary solidarity contribution.
- Member States shall ensure that existing or planned national measures sharing similar objectives as the temporary solidarity contribution under this Regulation comply with or complement the rules governing the temporary solidarity contribution set by this Regulation.
- The mandatory temporary solidarity contribution referred to in paragraph 1 shall apply from 31 December 2022 at the latest
Article 14 - Base for calculating the temporary solidarity contribution
The temporary solidarity contribution for EU companies and permanent establishments performing activities in the field of oil, gas, coal and refinery sectors shall be calculated on the taxable profits, as determined under national tax rules in the fiscal year starting on or after 1 January 2022, which are above a 20% increase of the average taxable profits, as determined under national tax rules, of the three fiscal years starting on or after 1 January 2019. If the average annual result from the period covering the three fiscal years starting on or after 1 January 2019 is negative, the average taxable profits shall be zero for the purpose of calculating the temporary solidarity contribution.
Article 15 - Rate for calculating the temporary solidarity contribution
- The rate applicable for calculating the temporary solidarity contribution shall be at least 33% of the base referred to in Article 14.
- The temporary solidarity contribution shall apply in addition to the regular taxes and levies applicable according to the national legislation of a Member State.
Article 16 - Use of proceeds from the temporary solidarity contribution
- Member States shall use the proceeds from the temporary solidarity contribution with sufficiently timely impact for the following purposes:
(a) financial support measures to final energy customers, and notably vulnerable households, to mitigate the effects of high energy prices, in a targeted manner;
(b) financial support measures to help reducing the energy consumption such as through demand reduction auctions or tender schemes, lowering the energy purchase costs of final energy customers for certain volumes of consumption, promoting investments by final energy customers into renewables, structural energy efficiency investments or other decarbonisation technologies;
(c) financial support measures to support companies in energy intensive industries provided that they are made conditional upon investments into renewable energies, energy efficiency or other decarbonisation technologies.
(d) financial support measures to develop the energy autonomy in particular investments in line with REPowerEU objectives notably projects with a cross-border dimension.
(e) in a spirit of solidarity, between Member States, assignment by Member States of a share of the proceeds of the temporary solidarity contribution to the common financing of measures to reduce the harmful effects of the energy crisis including support for protecting employment and the re- and upskilling of the workforce or to promote investments in energy efficiency and renewable energy including in cross-border projects.
- The measures referred to in paragraph 1 shall be clearly defined, transparent, proportionate, non-discriminatory and verifiable.
Article 17 - Temporary nature of the solidarity contribution
The temporary solidarity contribution applied by Member States in accordance with this Regulation shall be of a temporary nature. It shall only apply to surplus profits generated in the fiscal year that started on or after 1 January 2022.
A critical remark
Based on the proposal for a Council regulation, the temporary solidarity contribution will only apply to the fiscal year 2022. The solidarity contribution will only be levied over the taxable profits, as determined under national tax rules in the fiscal year starting on or after 1 January 2022, which are above a 20% increase of the average taxable profits of the fiscal years 2019, 2020 and 2021.The temporary solidarity contribution shall be at least 33% of the aforementioned increase.
Although named differently the temporary solidarity contribution is in my view principle a sort of a windfall tax.
My biggest critics regards the way in which the proposal for a Council Regulation defines normal profits. In all fairness the proposal for a Council Regulation does not use the term 'normal profits' but uses the term 'average taxable profits of the previous 3 fiscal years'. In my view this means that the European Council considers the taxable profits/losses that oil companies realized/incurred in the years 2019 through 2021 as the normal taxable profits to which the taxable profit to be realized in the fiscal year 2022 has to be compared.
Many will be of the opinion that the levying of a temporary solidarity tax can be justified. However, what can be said about the base over which it is levied. The fiscal years 2019 and 2020 in many cases will largely have been a normal year for oil companies. But what about the fiscal year 2020? The covid-19 outbreak severely impacted many businesses, including the companies that are active in the field of oil, gas, coal and refinery sectors. Some of the oil companies’ incomes/profits took a huge hit in the 2020 fiscal year. This hit that the oil companies took to their 2020 profit, significantly increases the base over which now the solidarity contribution will be calculated.
A simplified example
Company A is active in the in the field of oil, gas, coal and refinery sectors. Already for many years the yearly taxable profit of Company A amounts to 10 billion Euro. However, in the fiscal year 2020 the income of Company A took a huge blow as a result of which Company A incurred a taxable loss of 3 billion Euro. In 2021 the taxable profit recovered and amounted to 10 billion Euro again. In the fiscal year 2022 the taxable profit also amounts to 10 billion Euro. So what does this mean for the solidarity tax Company A will have to pay for 2022.
Calculation of the average taxable profit for the fiscal years 2019 through 2021
Taxable profit for 2019
Taxable profit for 2020
EUR -/- 3,000,000,000
Taxable profit for 2021
Average taxable profit for the 3 years
Calculation of the 20% increase
The 20% increase (that is allowed for the fiscal year 2022) is to be calculated over the EUR 5,666,666,667 and therefore amounts to EUR 1,133,333,333.
Over which amount will the solidarity contribution be due?
Consequently the solidarity contribution will be due over the amount with which the taxable profit of Company A will exceed EUR 6.8 billion (EUR 5.667 billion + EUR 1.133 billion).
How much solidarity contribution will be due by Company A over the fiscal year 2022
Since in the fiscal year 2022 the taxable profit of Company A amounts to the normal amount of 10 billion Euro, the solidarity contribution will be due over an amount of 3.2 billion Euro (10 billion -/- 6.8 billion). Therefore for Company A the solidarity contribution for Company A will at least amount to: EUR 1.056,000,000 (33% x 3.2 billion Euro).
In other words, Company A’s taxable profit did only return to the normal level and still Company A will have to pay a solidarity contribution. Can this be the intention of the European Commission?
Obviously in 2022 many companies that are active in the field of oil, gas, coal and refinery sectors are doing very well in 2022. And their taxable profits will be unexpectedly significantly higher than they would have been in a normal situation. And from that perspective it seems defendable that the European Commission wants to levy an additional tax. However, in my view the European is taking advantage of the unexpected blow the profits of many companies that are active in the field of oil, gas, coal and refinery sectors took in 2020 and one can question whether that should be the case.
Let’s assume that in 2022 the taxable profit of Company A increased to EUR 18 billion and that in 2020 it’s profit did not take a blow, but like in 2019 and 2020 also amounted to EUR 10 Billion. In that case the average taxable profit over the fiscal years 2019 through 2021 would amount to EUR 10 billion (3 times EUR 10 billion divided by 3). Therefore a 33% solidarity contribution will amount to EUR 1.98 billion (33% x (EUR 18 billion – (120% x EUR 10 billion)).
However, if we take the blow to the 2020 taxable profit into account the solidarity contribution to be paid by Company A will amount to approximately EUR 3.7 billion (33% x (EUR 18 billion -/- EUR 6.8 billion). See above for how we calculated the EUR 6.8 billion. Consequently the fact that the Company A’s 2020 taxable profit took a huge blow in 2020 results in Company A having to pay an additional amount of solidarity contribution that amounts to EUR 1.7 billion.
The full text of the a Proposal for a Council Regulation on an emergency intervention to address high energy prices as released by the European Commission on September 14, 2022 can be downloaded here.
Copyright – internationaltaxplaza.info