Windfall Tax - Optimization, Defense and its Solution

2. 5. 2023

As a result of the armed conflict in Ukraine and the rising prices of energy commodities, the Windfall Tax is gradually being introduced not only in the Czech Republic but also in other EU countries, with the aim of stabilizing public budgets and inflation itself. The main purpose of this tax is to levy the high profits of business companies specialized in the production and trade of electricity, gas and other fuels, whose prices have soared in the last year, and to bring money into public budgets and to those in need. The windfall profits tax applies, besides other things, to banks. Unsurprisingly, the tax's subjects are trying to minimize its impact as much as possible. 

There are several ways in which tax subjects try to eliminate the effects of the above tax. These are either by reducing the tax base through possible costs of mining recultivation and reduction of negative impacts during mining, through investments or other costs that may reduce the tax base. As a result of such a reduction in the tax base, the windfall profits tax can be reduced dramatically. Another way to reduce the impact of windfall profits tax is by moving the company’s seat to another country. The European Windfall Profits Tax Regulation generally provides for a windfall profits tax rate of 33 per cent, compared to a rate of 60 per cent in the Czech Republic. Therefore, the relocation of a company from the Czech Republic to another EU member state is not an elimination but merely a reduction of the impact of the extraordinary income tax.

The very rate of the windfall profits tax indirectly encourages its subjects to seek the best possible optimization of their tax bases and therefore avoid the taxation of the windfall profits tax as much as possible. It is worth mentioning, among other things, the 'problematic' definition of windfall or extraordinary profits. Banks are of the opinion that their profits cannot be classified as extraordinary. The banks also point to the incorrect definition of extraordinary profits, where the legislator defines them as 'anything in excess of the previous year's profits', whereas the estimates of profits from the taxation of the banking sector alone are unrealistic and based on exaggerated expectations of bank earnings.

The Windfall Tax is therefore an illustrative example of how the will of the legislature can be circumvented when the possibility of cooperation and agreement between the legislature and the taxed subjects has been omitted from the beginning.

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