Te wiki o te take; excess-profits-extra-taxes talk again

The Week In Tax Green Party proposes Excess Profit Tax, ATO Corporate Tax Transparency and OECD on Carbon Taxes

Earlier this week, the Green Party released a discussion paper on what is called an excess profits tax. This is part of its “commitment to a progressive and fair tax system”. What he is saying is that an excess profit tax or a windfall tax is needed to level the playing field so that “large corporations are not able to make excessive profits while so many people are struggling.”

The proposal comes on the back of Data showing that in fiscal year 2021, corporate profits reached $103 billion, up $24.5 billion from a year earlier. And you will remember taking corporate tax for the year to June 2022 was nearly $20 billion. The Green Party says we have several files going on right now. He believes there are excess profits made in times of hardship. There is also a need to address the impact of the unprecedented transfer of wealth that has occurred in response to the COVID 19 pandemic.

The discussion paper points out that windfall taxes are common in other countries. He noted that the EU is introducing a tax on excess profits in the energy sector. Spain has an excess profit tax on the energy sector and banks. Interestingly, the paper then uses the example of Britain under Margaret Thatcher in 1981, when the Conservative government introduced a windfall tax on banks. This raised the equivalent of around £3bn in today’s money and was around a fifth of the profits the banks were pocketing at the time.

It obviously caused quite a bit of controversy in 1981. The 1981 UK budget is one of the most controversial I can remember from my time. But Thatcher did not repent of what she had done. In her memoir The Downing Street Years, she replied

“Naturally the banks strongly opposed this, but the fact remains that they made their big profits through our policy of high interest rates rather than through increased efficiency or ‘better customer service.’

So I guess we live in a weird time where the Green Party quotes Margaret Thatcher with approval, but that’s a fair point. And keep in mind ANZ reported a net profit of 2 billion dollars for the first time.

Thus, windfall taxes are not uncommon elsewhere in the world. They are rare in the New Zealand tax framework and haven’t really been used for a very long time. They were used in both world wars, but apparently they weren’t entirely successful.

It’s good to start this discussion because I sometimes feel that the tax debate in New Zealand is very narrowly circumscribed. We live in unusual times, so is a windfall tax something that could be done? Even if it were, in my opinion, it should be one-time, such taxes should not be part of regular tax revenue. This is a point that I have seen addressed elsewhere, in particular in Ireland following the publication of a report on its tax system.

The Greens’ proposal suggests that a windfall tax could have retroactive effect. This would be very unpopular and rightly so for businesses, as it would mean there is no certainty in their planning. Companies can budget for a tax rate of 28%, only to suddenly find that in fact it has been increased to 33%. Companies would therefore struggle to manage this, but if they knew there was a possibility, it would be interesting to see how prices might play out.

All in all, it’s good to see this discussion continue and it will no doubt attract a lot of controversy and you can make your own submission on the idea to the Greens. Next year is an election year, so who knows what will happen next? But as I said, windfall taxes are used elsewhere in the world. And if they were good enough for Margaret Thatcher, well, who knows?

Australian “transparency”

Moving on to something else in Australia, the Australian Tax Office, (ATO) has just published its eighth annual report on corporate tax transparency. What this does is examine the amount of tax paid by large businesses for the year to June 2021. According to the report, the more than A$68 billion paid in that year by large companies are the highest since the start of the statement. It was up A$11 billion or 19.8% from the previous year, affected by COVID-19. Apparently, rising commodity prices have been a major driver of the corporate tax increase.

The report notes that Australia has some of the highest levels of large business tax compliance in the world, with 93% of taxes paid voluntarily. This rises to 96% after the ATO asks a few questions.

The ATO has been running what it calls the Tax Evasion Task Force for some time. According to the report since 2016, the ATO has increased tax liabilities by $29 billion and the Tax Avoidance Task Force funding is responsible for $17.2 billion of that amount. (It’s worth remembering that “increased liabilities” do not necessarily mean that they have been recovered). In last week’s Australian budget, there is an additional $200 million a year to help expand the scope of the tax avoidance task force. This brings the total funding for the Tax Avoidance Task Force to A$1.1 billion over the next four years.

Now, that report covered 2,468 legal entities, more than half of which were foreign-owned with an income of A$100 million or more. 529, or about 20%, were private Australian companies with revenue of $200 million or more, which is an indication of the size and scale of the Australian economy. Interestingly, there is a note that the percentage of entities that do not pay income tax was 32%.

It is interesting to see what other jurisdictions do with their tax data. I think the Inland Revenue should be doing a lot more in this space with the data they are receiving, but they are very reluctant to do so at this stage. It’s not currently part of his dissertation, but such a report and other statistics give us a better understanding of the size of the economy and what’s going on in it. I would like to see Inland Revenue produce something similar.

Energy, taxation and carbon pricing

Finally, this week, overnight, the OECD released his latest report on the pricing of greenhouse gas emissions. This looks at how carbon prices, energy prices and subsidies have evolved between 2018 and 2021. This is part of a database that the OECD is developing to track what is happening on energy, taxation and carbon pricing.

This report covers 71 countries (including New Zealand) which together account for around 80% of global greenhouse gas emissions and energy consumption. There is also a summary report by country. Overall, more than 40% of greenhouse gas emissions in 2021 were covered by carbon prices, up from 32% in 2018. And the average carbon price from emissions trading systems and carbon taxes more than doubled to €4 per tonne of CO2. equivalent.

And of course, the report describes what is happening around the world. There has been an increase in the amount of greenhouse gas emissions now covered, and this is the result of the introduction or extension of explicit carbon pricing mechanisms, notably in Canada, China and Germany .

So-called net carbon prices increase further in 2021, as do permit prices under emissions trading schemes. There are constant changes in carbon taxes, with the introduction of new carbon taxes, as well as increases in carbon tax rates or the phasing out of carbon tax exemptions.

As for New Zealand, 44.1% of all greenhouse gas emissions are now subject to a positive “net effective carbon rate”, which has not changed since 2018. The report also notes that fuel excise taxes, which are described as an implicit form of carbon pricing cover 23.8% of emissions. Again, that’s unchanged from 2018. So looking at that, we seem to be stagnating a bit on that and wondering if next year’s report might show that due to the reduction in duties excise duty on fuel, we have backed off. However, other countries have also reduced fuel taxes due to high inflation following the war in Ukraine.

While the level of coverage of greenhouse gases covered by carbon pricing has not changed since 2018, the average carbon price has increased. For example, excise duties on fuels in 2021 amount to €19.73 per tonne of CO2 equivalent. This is up by +9.4% compared to 2018, which is however probably lower than inflation. However, once adjusted for inflation, the average net effective carbon rate on greenhouse gas emissions has increased by +39% since 2018

There’s a lot to consider in this report, more than I’ve had a chance to read through at this time. But again, this reflects a consistent theme of this podcast about the growing role of environmental taxation and the scope of opportunity in this space.

What we do with those funds is the other side of the equation. It is one thing to say that we need more taxes. What is not always debated is what we do with those taxes. I repeat my long-standing view that funds from environmental taxation in the form of new taxes or from the existing emissions trading system should be used to mitigate the impact of climate change.

There was a report earlier this week, identifying 44 communities at high risk of environmental impact from climate change that are unprepared for the risk of flooding. No doubt they will seek help. Meanwhile, Nick Smith, Nelson’s new mayor (and former environment minister) has asked for help from the government dealing with the impact of the recent floods. No doubt there will be many more to come on this topic.

And on that note, that’s it for this week. I’m Terry Baucher and you can find this podcast on my website www.baucher.tax or wherever you get your podcasts. Thanks for listening and please send me your feedback and tell your friends and customers.

Until next time kia pai te wiki, have a great week!

*Terry Baucher is an Auckland-based tax practitioner with 25 years’ experience. He works with individuals and entities that have complex tax issues. Before starting his own business, he spent six years with one of the ‘big four’ accounting firms, including a period advising Australian businesses on how to do business in New Zealand. You can contact him here.

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