The coming Windfall
No, this editorial isn’t an advertisement for a prequel to a popular TV series. This “windfall” isn’t a new show, but “unexpected income” that someone realizes without any effort due to extraordinary external circumstances rather than their own doing.
These external circumstances are currently considered (at least by the National Economic Council of the Government known by the acronym NERV) to be not only the increase in energy prices and energy raw materials caused by energy policy and the military conflict in Eastern Europe, where all energy prices are rising regardless of the cost structure of their producers, but also the rise in interest rates caused by the unbridled printing of money to cover COVID deficits, present and future, caused by war, economic downturn or governments’ fiscal irresponsibility.
Those that are “excessively” benefiting from these external impacts, according to the government council, are mainly energy suppliers, which realize high market prices regardless of the source of the energy they produce, and banks, which are able to reflect increased interest rates in their revenues faster than they are passed through to their costs (possibly also refineries and fuel distributors).
According to NERV experts, the least bad solution to the above situation would be the so-called windfall tax that would lead to the transfer of these profits to affected businesses and households, either in the form of direct payments, or at least by not raising other taxes to cover deficits, and that should also have an anti-inflationary benefit.
Far from being a new idea, a similar principle was applied in this country, for example, more than 100 years ago to finance the First World War; it is currently being applied in the UK, has been introduced in Hungary and is being considered by other EU countries.
According to some sources, the Ministry of Finance is already translating expert considerations and recommendations into a draft legal text according to which the tax would apply for calendar years 2023-2025 and would affect the largest groups with businesses exceeding certain criteria and operating in selected industries.
However, the most interesting parameters, such as the specific industries (defined by NACE codes), the size of the selected sales threshold per group or enterprise and especially the tax rate, are not yet known and will probably be the subject of political debate.
The tax base should, according to the available information, be the difference between the current tax base and the average of the adjusted historical tax bases for the period 2015 to 2021 (most likely “indexed” for inflation and probably some small increase).
Both tax bases (i.e. current and historical) should be based on line 220 of the tax return after adjusting for foreign income (i.e. before applying items reducing the tax base). The proposal works with the possibility to transfer, under certain conditions, the amounts of the average historical bases between companies in a group. Advances would be made on the tax (and already in 2023).
Interestingly, the tax could also apply to companies in a group that have nothing to do with the selected industries (presumably electricity, banking and possibly some fuels). The tax could also affect companies that don’t necessarily have higher profitability, but that have just grown (i.e. volume vs profitability). The question is whether such a thing would be consistent with the presented objectives of the law and whether there is any simple solution to it.
The entire group, including foreign entities, would presumably be subject to the tax. Their income could then be excluded because “income from foreign sources that is subject to foreign taxation under an international treaty will not be included in the base”.
At the moment, therefore, it is essential to monitor the dramatic developments that this mechanism is undergoing and to hope that its eventual impact on the economy will actually be as beneficial as experts predict.