Tax accounting considerations Solidarity Contribution Tax

On 14 September 2022, the European Commission (EC) published a proposal for a Council Regulation on an emergency intervention to address high energy prices (the proposed Regulation).

The proposed Regulation encompasses four measures in total. One of the measures is the introduction of an EU-wide temporary mandatory solidarity contribution tax of at least 33 per cent levied over 2022 excess profits generated from activities in the oil, gas, coal and refinery sectors (the Solidarity Contribution Tax).

The proposed Regulation will be discussed at an extraordinary Council meeting scheduled for 30 September 2022. Unlike an EU Directive, an EU Regulation will be binding to all EU Member States and thus implementation into national law would not be necessary.

In this publication, we discuss how the proposed Solidarity Contribution Tax could impact the (Interim) Financial Statements once it has been considered as (substantively) enacted for financial accounting purposes. For addressing the tax accounting implications, we take the International Financial Reporting Standards (IFRS) as applicable accounting standard.

What does this mean for your organisation?

The proposed Regulation introduces a temporary mandatory Solidarity Contribution Tax for the fossil industry applicable in all EU Member States and should apply from 1 January 2022 until 31 December 2022.

If the proposed Regulation is approved during the extraordinary Council meeting dated 30 September 2022, the Solidarity Contribution Tax will be considered as substantively enacted under IFRS. Consequently, companies should consider the tax accounting implications of the new tax and take these into account for (interim) reporting periods ending on or after 30 September 2022 (i.e., including Q3 2022).

Overview of the Solidarity Contribution Tax

A brief overview of the mechanism of the Solidarity Contribution Tax is provided here below, or read more in our article European Commission intervenes to address high energy prices.

Scope (Article 1 of the proposed Regulation)

EU companies and permanent establishments with activities predominantly in the oil, gas, coal and refinery sectors are within the scope of the proposed Solidarity Contribution Tax.

Solidarity contribution base (Article 14 of the proposed Regulation)

The basis for calculating the solidarity contribution are taxable profits in 2022 (fiscal year starting on or after 1 January 2022) from activities in the oil, gas, coal and refinery sector as determined under bilateral treaties or EU Member State’s national tax laws, which are above a 20 per cent increase of the average taxable profits generated in the three fiscal years starting on or after 1 January 2019. A negative average annual result leads to average taxable profits being zero.

Applicable tax rate (Article 15 of the proposed Regulation)

The rate applicable for calculating the solidarity contribution is at least 33 per cent of the solidarity contribution base as mentioned here above. Note that the preamble to the proposed Regulation states that EU Member States remain free to apply a higher rate if they already apply a similar contribution/levy/tax).

Duration (Article 17 of the proposed Regulation)

The Solidarity Contribution Tax applies for a period of one year (covering the period 1 January - 31 December 2022) after entering into force of the Regulation (one day following the publication in the official EU journal, which should be no later than 31 December 2022). Hence, the new tax is temporary in nature.

The EU Member States shall use the proceeds from the contribution to facilitate financial support measures in a defined, transparent, proportionate, non-discriminatory and verifiable manner.