In the previous days, a draft law on income tax was to be discussed, which would implement the extraordinary profit tax (Windfall Tax) into law from 2023 (for a period of three years). It is an instrument that has never been used in the modern history of the Czech Republic. Based on currently available information, an instrument of a similar nature is also used or in preparation in the UK, Hungary, Spain or Italy. Despite the initial proclamations and expectations, the draft has not yet been discussed; however, the idea of the Windfall Tax is of course still very alive and its introduction cannot be ruled out.
The Windfall Tax aim is the taxation of extraordinary profits that were and will be reached in selected industries (banking sector, energy and fuel production) based on external effects, i.e. primarily due to the rapid growth of the CNB’s interest rates and dramatic increase in energy and fuel prices. Conversely, at least according to the theory, profits generated through innovations, investments or savings made by the taxpayers themselves should not be subject to the extraordinary profit tax. The tax rate should oscillate between 40% and 60%.
Enough theory. In practice, there are certainly supporters as well as opponents of the “new tax”, as is the case in most areas of human activity. Without tending to one side or the other as tax advisors, we are curious how the legislator and mainly the practice will deal with various aspects that can arise in relation to the possible implementation of the tax. As we know, the devil is in the details…
Lots of questions
One may think of questions such as (i) who will be affected by the tax, (ii) how the tax base will be determined, or (iii) if this tax is in compliance with the Constitution of the Czech Republic, as it is imposed only on certain industries.
We probably know or have an idea which sectors the tax will apply to. However, how will the range of specific taxpayers affected by the tax be defined? For example, is it going to be only the parent company, which is a bank, and not its subsidiaries engaging in leasing? Is the whole group going to be involved? What about a manufacturing company that has established a small hydroelectric power station on a neighbouring brook or stream, while investing huge amounts into photovoltaics on the roofs of its buildings?
There is some talk about the tax base for extraordinary profits being determined as the difference between the profit (or tax base?) for, say 2023 and the average of the profits/tax bases for the previous five years. Is this profit going to be adjusted for, say, the worst and best year? In what way will investment or development activity, which should start to bear fruit from 2023 onwards, be reflected? In what way will the negative impacts of the previous pandemic period be taken into account? What about the companies that benefit from investment incentives in the form of tax relief? Or the companies that had or have had different accounting periods due to transitions between the calendar and financial year? What if a company decides to use the possibility to suspend tax depreciations? Companies that went through or will go through various restructuring processes, such as a merger, demerger, spin-off, etc., may probably encounter difficulties.
These and other questions may be answered by the government’s draft text of the law, so, let’s wait and see. However, we assume that Windfall Tax may lead to a rather significant modification of the Income Tax Act, it may complicate the preparation process of tax returns itself, bring considerable changes to the tax return form, etc. Perhaps the question will arise whether in practice, from the perspective of the actual legislation process, as well as from the perspective of the taxpayers themselves and the tax administration, a progressive tax rate for selected industries using the current text of the law would be easier…
The article is based only on information that is generally available at this time (21 September 2022).