Editorial - Once upon a tax time
Most of us simply can’t imagine the end of the year without fairy tales. Every year, filmmakers and TV stations compete to see who can come up with the best idea, who can surprise the discerning viewer or who can impress with something quite special.
The legislature has apparently decided to take part in this year's competition for the most original Christmas event. That's why it has already published an Energy Act amendment in the Collection of Laws slightly in advance (30 November 2022), introducing the so-called levy on excessive revenue into Czech legislation. The subject of the levy is defined as the positive difference between the market income generated from the sale of electricity and the statutory price cap on market income: simply put, the amount by which a producer or distributor sells electricity at a price higher than the price ceiling. The levy reaches an impressive 95%.
Let me start with a little excursion into tax theory. The current legal and economic literature generally agrees that the concept of tax can be defined as a mandatory, non-refundable, statutory payment to the public budget that is a non-purposed and creates no entitlement to an equivalent consideration.
At first glance, it might seem that there is no significant difference between the above definition of a tax and a levy on excessive revenue (it certainly seems so to us). The levy on excessive revenue is undoubtedly a compulsory and irreversible payment that is a revenue of the state budget. The person liable to pay this levy receives no consideration for it. The administration of the levy is carried out in accordance with the Tax Code; the law uses the institutions of advances, notification or overview in the same way as the tax regulations. Although the administration of the levy is rather surprisingly carried out by the Energy Regulatory Office, the latter may request the Specialised Financial Office or another Financial Administration body to carry out its actions. The law even refers to the person liable for the levy as the taxpayer. But be careful, it's not a tax.
If the situation described above reminds you a little of the fairy tale by Božena Němcová, The Clever Highland Woman, or, for the younger ones, of Werich's The Carousel Queen I, who was forced to come to the king, dressed-not dressed, coiffed-not coiffed and to bring a gift-not a gift, you are not alone.
The reason for the legislature's effort to exclude the levy on excessive revenues from the tax system is quite simple. The levy is based on part of the European Council Regulation (EU) 2022/1854, and if it were a tax, such a regulation (at the EU level) would have to be unanimously approved by all Member States. However, it is enough not to call the aforementioned fee a tax, but, for example, a levy or a temporary solidarity contribution, thus (perhaps) elegantly avoiding this unpleasant complication.
From a tax advisor's point of view, the tax fairy tale is interesting from several aspects. For example, the accelerated legislative process itself or the effective date just one after the date of publication in the Collection of Laws. Or the combination of different lengths of levy periods, where the first levy period is a calendar month (December 2022) and the second levy period is a calendar year (2023). The first levy period is not subject to the advance payment obligation, while the second is. The result is a rather convoluted arrangement whereby the advance payment for the second levy period is due earlier (27 February 2023) than the payment for the first levy period (28 February 2023).
And other questions arise – can an excessive revenue taxpayer freely decide that it is not economically rational for it to sell electricity at an amount above the price cap because, while its profits will increase only marginally, the impact on the quality of its relationships with its trading partners may be many times more significant? Can such a justified price be considered a normal price within the meaning of § 23(7) of the Income Tax Act? If not, can such a pricing strategy (in the case of related persons) be regarded as satisfactory evidence of the difference under the provisions of § 23(7) of the Income Tax Act?
It is also important not to confuse this levy with the 60% windfall tax, which, on the contrary, is a part of the tax package and has received considerable public and media attention.
However, the excess profits levy and the windfall profits tax have one thing in common. Both these bills simply came out wrong. Unfortunately, only time will tell how much more taxpayer money subsequent lawsuits and litigation will cost.
Nevertheless, I would like to wish you a wonderful, successful and prosperous 2023.
