Tax on the excess profits of energy companies: What can and cannot be done and why?

A fiscal question : how can we get the extra energy revenues to contribute?

The International Energy Agency has calculated that energy producers in the European Union will have an additional revenue of €200 billion in 2022. Romania has introduced a progressive tax on gas operators at a rate of 70% in the highest bracket. Other European Member States, such as Italy and Spain, have introduced an income tax on so-called excess profits from energy products. The aim is to ensure that these companies contribute more to measures that help families cope with sudden increases in their energy prices.  The German government is considering whether to introduce such special measures.   In Belgium, all kinds of proposals are being made by political parties and expert groups. The political call to tax excess energy profits is gaining strength.  What can and cannot be done and why?

Wanted Law asked lawyers Paul Verhaeghe and Roel Deseyn of Wanted Law Tax.

Have such special taxes ever been passed in Belgium under exceptional circumstances?

Since the Second World War, there are two cases in Belgian history where special corporate taxes on additional company profits have been decided.  In 1952, at the time of the Korean War, an additional tax of 25% was levied on extra profits. The Belgian legislator then considered that it was: 

"inconceivable that certain privileged classes were getting richer (...) while the citizens have to bear the burden of the rising prices of products (...)".

In the mid-1970s, following the oil crisis, an additional corporate tax of 4.8% was levied on profits above 6%.  In this historical perspective, it is logical that, in the circumstances we are experiencing today, similar special measures are also advocated in Belgium and other European Member States to make these excess profits obtained through energy prices contribute more.

What is different from that time?

The main difference is that, since the 1980s, there has been a constitutional court in Belgium that checks whether tax laws are not discriminatory. Unlike most other countries, Belgian taxpayers have direct access to the Constitutional Court to challenge and, if necessary, overturn tax laws. 

Since the mid-1990s, the World Trade Organisation has provided protection against discriminatory measures for companies inside and outside the European Union through the GATT (General Agreement on Trade and Tariffs) treaty.  This treaty provides for its own tribunal and court in which countries can fight and seek compensation if they feel that an extraordinary tax regime is in fact directed against and discriminates against their nationals.

Even within the European Union, the 1950s and 1970s are hardly comparable in terms of obligations on national legislators not to discriminate through the adoption of extraordinary tax regimes.  Since the introduction of the Charter of Fundamental Rights, unequal treatment of taxpayers must always be particularly justified.  The Court of Justice will make this assessment when it is claimed that the effects of a national tax law impede fundamental freedoms.  This may be the case if the tax measure also taxes the income of companies established in another Member State.  Then the requirements of the Treaty on the Functioning of the European Union come into play.  The Court of Justice thus ensures that European Member States such as Belgium must justify the effects of their tax laws on fundamental rights and freedoms.

And then there are the bilateral tax treaties between countries which are interpreted and applied in an evolving manner. Between EU Member States, a directive governs the procedure for discussing the application of these treaties as of 2018 income.  Similarly, this directive transposed in Belgium with the law of 2 May 2019 transposing Council Directive (EU) 2017/1852 of 10 October 2017 on tax dispute resolution mechanisms in the European Union (Official Gazette, 17 May 2019) has significantly strengthened the rights of companies that feel they have been treated unequally to submit an extraordinary national tax law for review in light of the non-discrimination requirement.

The legislator's power to adopt extraordinary tax measures today therefore requires, in contrast to previous legislation that decided on such measures, a particularly clear and comprehensive statement of what (1) is the reason for the special measure, (2) what exactly is the purpose of the measure, and (3) what criteria are relevant to effectively achieving that purpose, (4) without going beyond what is necessary.

(1) What exceptional circumstance is being invoked as a reason?

Proposals that refer to historical circumstances of war or severe economic depression will have difficulties if Belgium is not at war at the time of the introduction of the exceptional measure or if the economy is not yet at least in severe recession. 

The Vooruit proposal that refers to historical measures due to exceptional circumstances that do not (yet) exist today seems to us to encounter difficulties in justifying the introduction of a similar historical special regime in 2022.  However, the Vooruit proposal, like the other proposals, also refers to sudden price increases as a reason for a special tax measure that taxes additional profits (excess profits) more heavily.

In our opinion, a special tax measure can be adequately justified because of the sudden international price increase of essential goods. Such as energy, for which the government has decided to mitigate the impact on purchasers through ad hoc measures.  This is an exceptional circumstance that justifies the introduction of a special corporate tax regime for sellers who continue to produce or purchase energy without a significant increase in their costs but who, due to the same international market conditions, have suddenly been able to sell this energy in 2022 with significantly higher additional revenues.

(2) What does the special tax measure want to achieve?

Exceptional circumstances cause effects that special measures are intended to address.   In order to pass the test, e.g. with regard to the need to finance measures to preserve purchasing power, there must be a logical causal link between the special tax measure and a sudden impoverishment of a part of the population and companies to buy indispensable things and a sudden excessive additional revenue of the sellers of these things. 

The aim of the special tax measure is then to ensure that the increased financial capacity through sales in Belgium contributes more to the sudden additional budgetary burden for Belgium.  It is considered unfair that the excess profits made in this way do not contribute more than the corporate taxes normally due on these excess profits.  After all, all companies pay similar rates of corporation tax, which means that at equal rates, the budgetary cost will have to be borne to a much greater extent by the citizens and companies who already must pay these suddenly higher costs. They therefore pay twice and suffer a reduction of their financial capacity, while sellers contribute only once by increasing their financial capacity.  It is then considered fair to seek a fairer balance between taxpayers through the special tax measure. This is done by means of an increased contribution, whereby the companies concerned pay a second time like other taxpayers. This is the so-called aim or objective of the special tax measure and is therefore motivated by reasons of fairness to distribute the additional tax burden among taxpayers according to this modified financial capacity (Ability-to-pay principle).

In this respect, the proposal of the PTB-PVDA does not seem to us to be in a logical link between the cause and the objective of the norm because it works with an average profit that may be independent of the cause. Companies could already be very profitable before, and millionaires were probably already millionaires before the Covid pandemic, the energy transition, or the energy crisis, which are invoked as causes.  Above-average profits can perfectly well be achieved by sales that do not benefit from international price increases.  The introduction of these measures is not logically linked to the causes invoked because there is no increase in financial capacity for this cause.  This criterion only notes a financial capacity independently of its cause.  The effect, and therefore the intention, of such a proposal is to pursue a general policy of redistribution invoking these exceptional causes.  However, as there is no link with the cause of the change in financial capacity between taxpayers, this measure can be maintained after its introduction.  And this even after international energy prices have returned to a lower level.

The Vooruit proposal seems to us to have problems in this respect as well, just like any other proposal that talks about "excess" profits.  Large profit margins could already exist in companies or be due to all sorts of reasons unrelated to the exceptional circumstances.   It must therefore be possible to justify the link to an advantage solely obtained by the specific market conditions which, at the same time, has caused a disadvantage to others which the special measure seeks to mitigate.

Without this link, the special measure has a general redistributive effect that may persist after the specific market circumstances and this disadvantage have ceased.  And this may put the special tax regime in difficulty if this effect was not explicitly justified as so intended when the special measure was introduced.

For the "excess profit", which from the point of view of the equity objective pursued by the norm should be logically related to the cause of the special tax measures, it should at least be established first that significant additional revenues were indeed generated by the sales of energy in Belgium by the energy sellers.  And then verify to what extent additional taxable income has been declared in Belgium.  Which should then be taxed at a higher rate because of the objective of the measure. This is to achieve a more equitable contribution according to the modified financial capacity between the taxpayers.

(3) How can this be achieved effectively?

The criteria of the special tax measure that increase the contribution of excess profits of energy companies must ensure that more corporate tax is actually paid by those who have been able to obtain more taxable income due to higher energy prices. 

Also for this third requirement, Vooruit's proposal to apply historical criteria to determine excess profit seems problematic to us. After all, our economy has evolved from the production of iron and steel to digital ways of creating wealth.  Old recipes that rely on large capital requirements to produce more need to justify why they are an effective means to the end in a digital economy where production is co-determined by the user at negligible additional cost.

Any criterion for establishing an "excess" profit to apply the special measure seems to us arbitrary and ineffective in expressing a proportionate increase in financial capacity. 10 million of additional taxable income obtained solely because of changed market conditions is subject to an additional contribution in one case and not in the other? What does this have to do with the level of the profit margin? Is accounting profitability a logical criterion if one simply receives more? After all, the "old" prices already included all production costs. 

Moreover, the criterion of an increase in declared profit (excess profit) to tax more heavily or not, opens the door to all sorts of undesirable consequences as companies will try to declare less profit.  From an accounting point of view, a lot can happen before additional taxable income is translated into additional reported profit. The company may make a variety of decisions to incur extraordinary expenses because of this special regime. What if a company decides to make extraordinary investments or a series of capital increases just to avoid falling into the "excess" profit test?  Costs may also be shifted from one Member State to another, and, because of seat transfers, the end result may be a lower contribution in Belgium.

We therefore advocate taxing based on a significant increase in taxable income.  The term "additional revenue" refers to what was spent in cash flow during the financial year to obtain the energy and what was received in cash flow for that energy.  The additional net revenue (income) is then subject to a graduated rate of corporation tax of up to 50% (double the normal rate for the highest increases), from which the corporation tax normally due, under normal rules, on this additional taxable income can be deducted. These criteria do not depend on any management decision by the seller that might reduce or increase the accounting profit, thus making avoidance mechanisms unnecessary and logically linked to the objective of the measure.   When international market prices return to a normal level, there will be no further significant increase in additional taxable income and the special scheme will be phased out pending its abolition.

(4) No further than necessary?

The main cause of the price increase on the international markets in 2022 is the scarcity of a raw material due to the war in Ukraine: gas.  Before that, there were already significant price increases in 2021 due to the global economic recovery, which could not be absorbed in time by oil and gas producers. As gas supply has become uncertain, gas-fired electricity is becoming more expensive.  This is reflected in the price of electricity sold on the international market.  This applies to electricity in particular that is not produced from gas, and which can therefore generate significant additional income without significant additional costs.

The proposals of the Vooruit and the PTB- PVDA use criteria that tax excess profits where they occur without any logical link to these causes.  They risk discriminating with their proposals when companies demonstrate that they already had high profits that were not caused by sudden excess profits from the sale of electricity.

The Groen proposal reported in the press would focus mainly on energy companies, i.e. nuclear power producers.  However, wind and solar power can also benefit significantly from the sudden increase in revenue if these companies are not bound by contracts for fixed delivery prices.  Targeting a specific business model when competing business models are also generating sudden and significant gains is also likely to be considered a form of discrimination for which there is no reasonable justification. Subjecting a business model to a specific tax regime must be particularly well justified to avoid discrimination.

On these grounds we argue that all electricity producers and distributors should be subject to a special regime that aims at a fairer distribution of the burden.  This applies to all companies that, for example, have solar panels, wind turbines or derived industrial processes that enable them to produce or procure their electricity at a fixed cost and sell it themselves at premium market prices. This is therefore commensurate with a significant effective increase in their financial capacity resulting from the substantial additional revenues received from international price increases. 

So, what can be done?

Belgian taxpayers are directly and indirectly affected by the sudden rise in energy prices.   The one-off extra efforts of the government are financed by borrowed money that will have to be paid back by all Belgian taxpayers in one way or another.   It is therefore only fair to ask those with a much greater financial capacity, obtained through higher prices, to contribute more (Ability to pay principle).

Moreover, both the one-off efforts of the federal government (social tariff, excise duty reduction, VAT reduction) and the structural efforts (indexation) enable electricity buyers to continue to pay these high prices.  All suppliers and sellers of electricity in Belgium therefore benefit directly or indirectly from the social protection measures in Belgium.  They can therefore be asked to contribute more to the cost of these measures (benefit principle).

Fairness requires on these grounds to measure the increase in revenue received in Belgium due to the exceptional market conditions.  This increase was paid for by Belgian taxpayers. If this increase in revenue is not accompanied by an increase in expenditure for the seller, then this additional revenue has been generated by these exceptional market circumstances.  It is then justified that all sellers of electricity contribute progressively according to their increased financial capacity through these additional revenues. As a result, Belgian taxpayers will have to contribute proportionately less to the measures to support their purchasing power.  They then pay less the 'second time around' (see above) thanks to the higher contributions of those whose financial capacity has improved because of the increase in energy prices.

To tax the increase in revenue and the financial capacity fairly and effectively according to the actual increase, the accounting concept of profit must be abandoned.  The net income figure that is obtained in that year by deducting the outgoing funds for the cost price of production or purchase of electricity from the incoming funds from the additional revenue is a relevant criterion for objectively measuring the increase in financial capacity per year. 

If this increase in net income proves to be very large, for example because the seller has a large market share, it is fair to ask electricity sellers in Belgium to contribute even more by means of a progressive wealth tax of up to 50%, from which the corporation tax paid based on the declared accounting profit is deductible.

If this increase in financial capacity turns out to be modest because there are not many sales, there is no proportionate justification for taxing them more heavily.  We propose to exempt sellers of less than 1 million kWh in Belgium and to tax sellers more heavily only if the increase in net revenues is at least 20% compared to the ratio of incoming and outgoing funds from the sale of electricity in Belgium in the financial year 2019.

The significant increase in financial capacity activates a special taxable base for the calculation of a progressive corporate tax on the net income from the sale of electricity in Belgium.  We consider the following increase:

• The increase is less than 100 million euros?  The 25% rate applies.
• The increase is between 100 and 250 million euros?  A rate of 30% applies to this band.
• The increase is between 250 and 500 million euros?  A rate of 40% applies to this band.
• The increase is more than €500 million?  A rate of 50% applies to the higher rate.

Corporate tax due based on the share of sales in Belgium in the reported accounting profit is deductible.

Does such a proposal to tax the additional revenue from the sale of energy in Belgium more, in turn, meet the four requirements against discrimination?

(1) What exceptional circumstances are invoked as grounds?

Our proposal is based on a logical link between the cause and the size of the expenses incurred in Belgium by the federal government to cope with increases in international electricity prices, on the one hand, and the size of the revenues of electricity sellers in Belgium, on the other.

As soon as international market prices start to fall, the costs for buyers and the revenues for sellers decrease accordingly. As soon as the 20% level is reached in relation to 2019 in the ratio of incoming and outgoing funds in that financial year, the extraordinary tax measure will no longer apply to this company. The remaining increase in financial capacity no longer justifies a correction.

(2) What do we hope to achieve?

That the increase in the financial capacity of electricity sellers in Belgium leads to a fairer distribution of the budgetary burden for Belgian taxpayers who pay twice; once for their own energy costs and a second time for the government's budgetary burden.  Their financial capacity is reduced.  Sellers pay normal corporate tax once like everyone else and contribute a second time in proportion to their increased financial capacity from energy sales in Belgium.   The overall effort is thus more equally distributed.

(3) How can this be achieved effectively?

All sellers of electricity in Belgium who manage to sell at variable market prices and to produce at lower cost, and thus to realise significant additional revenue, are gradually taxed in proportion to the increase in their financial capacity from sales in Belgium.

Sellers of electricity who had to buy it themselves at a high price will not have a significant increase in revenue from these sales and, because of the ratio, do not fall under the special tax measure because their financial capacity has not increased to a significant extent because of international price quotations.

There is a logical link between the cause, the purpose of the measure and the criteria.

(4) Without going further than necessary?

Only revenues from the sale of electricity in Belgium are targeted because only these revenues benefit from the preservation of the purchasing power of Belgian customers thanks to the measures taken by the federal government.

Limited increases in financial capacity from the sale of electricity in Belgium are exempted for volumes sold below 1 million kWh.  This also ensures that the special tax measure does not conflict with other energy transition objectives.

By setting a ratio, the mechanism will be switched off when international market prices return to a normal level.

Is it possible, a progressive corporate tax based on net turnover and applied only to electricity sales in Belgium?

Yes, it is possible.  We quote from the 2 March 2020 judgment of the Court of Justice (CJEU, 3 March 2020, Vodafone Magyarország Mobil Távközlési Zrt. v. Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága, C-75/18) concerning a progressive Hungarian corporate tax introduced only on the turnover achieved by telecoms companies active in Hungary:

"49.  However, it must be recalled that the Member States are free, given the current state of harmonisation of EU tax law, to establish the system of taxation that they deem the most appropriate, and consequently the application of progressive taxation falls within the discretion of each Member State (see, to that effect, judgments of 22 June 1976, Bobie Getränkevertrieb, 127/75, EU:C:1976:95, paragraph 9, and of 6 December 2007, Columbus Container Services, C‑298/05, EU:C:2007:754, paragraphs 51 and 53).

50.  In that context, and contrary to what is maintained by the Commission, progressive taxation may be based on turnover, since, on the one hand, the amount of turnover constitutes a criterion of differentiation that is neutral and, on the other, turnover constitutes a relevant indicator of a taxable person’s ability to pay.

51.  In this case, it is apparent from the material available to the Court, in particular from the passage in the preamble of the law on the special tax on certain sectors quoted in paragraph 4 of the present judgment, that, by means of the application of a progressive scale based on turnover, the aim of that law is to impose a tax on taxable persons who have an ability to pay ‘that exceeds the general obligation to pay tax’."

At the Belgian level, the Constitutional Court applies the principle of exercising only marginal control when a government takes a tax measure in relation to its own powers.

If one opts for the criterion of additional revenue to tax the increase in the financial capacity of electricity sellers in Belgium, we believe that a minimum annual revenue of 2 billion euros is possible for as long as the high price quotations persist