The story goes like this:
IA tax advisor was narrating the Cinderella story to his little daughter. The girl listened with rapt attention as her dad droned on. Past the evil stepmother, the horrid stepsisters, the cinders and overall misery of Cinderella’s existence. The girl, who usually assailed her dad with a barrage of questions, stayed quiet all through this. And then there was a twist in the story. The little girl’s interest was piqued. It was that moment when the pumpkin turns into a golden carriage. The dad knew a kiddie question was coming his way. The kind he thought he could swat away. But he was stumped by what came next.
The girl asked, “Daddy, when the pumpkin turned into a golden carriage would that be classified as income or a long-term capital gain?”
This piece of fiction aside, taxation is clearly not terra firma; it’s at best a quagmire.
Soft and shapeshifting. To be treaded upon cautiously.
Of all the places on the planet, taxation could take an interesting turn in the EU this year.
It’s been 15 months now since the European Union announced Windfall Taxes on fossil fuel companies. The rollout appeared hasty. The implementation, chaotic.
In Sep 2022, in the aftermath of the Russia-Ukraine war and the resulting super-spikes in energy and electricity prices, the EU agreed on a temporary tax on fossil fuel companies, applied on profits exceeding 20% of a firm’s average profits over the previous four years.
I referred to taxation as a shapeshifting quagmire earlier on. And for good reason. There are many other references to taxation such as levy, surcharge, cess, and duty.
The ones that an investor into energy assets in the EU must be wary off in the current context are ‘tax’ and ‘levy’.
Why?
Because a ‘Windfall Tax’ doesn’t start out as a ‘Tax’, it starts out instead as a Levy ─ a temporary measure to raise revenues, usually in response to a crisis.
A Windfall Tax is undoubtedly populist and is music to a taxpayer’s ears, but it appears that the EU has unwittingly let the genie out of the bottle.
How do you roll back something this populist?
Not surprisingly, many countries from the EU (Czech, Hungary, Slovakia, Spain) now plan to extend the application beyond the original phaseout timeline of Dec 31, 2023.
While these Windfall Taxes took straight aim at the Energy and Electricity Producers, some countries within the EU brought in a few more industries within the scope of these taxes (Italy sandbagged the banking sector with its Aug 2023 announcement of a 40% levy; Portugal targeted food distribution).
The EU had projected a €140 bio largesse from these taxes in Sep 2022, but the initiative has only yielded a fraction ─ levies on surplus revenue earned by fossil fuel companies in the EU have generated only €17.5 bio (source: Law360 UK).
Its early days in 2024 but with energy and electricity prices having cratered from their 2022 peaks (see pic), are there any windfall gains left to be taxed?
