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© 2022 International Monetary Fund
WP/22/187
IMF Working Paper
Fiscal Affairs Department
Excess Profit Taxes: Historical Perspective and Contemporary Relevance
Prepared by Shafik Hebous, Dinar Prihardini, and Nate Vernon*
Authorized for distribution by Mario Mansour
September 2022
IMF Working Papers describe research in progress by the author(s)and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
ABSTRACT: This paper discusses the design of excess profits taxes (EPTs) that gained renewed interest following the COVID-19 outbreak and the recent surge in energy prices. EPTs can be designed as an efficient tax only falling on economic rent, like an allowance for corporate capital, and drawing some parallels with current proposals for reforming multinationals’taxation. EPTs can be permanent or temporary as an add-on to the corporate income tax to support revenue during an adverse shock episode. The latter reflects experiences with EPTs during and after the World Wars. Different from that era, though, profit shifting is now a challenge. Estimation using firm-level data suggest that, at present, locations of excess profit across countries are consistent with profit shifting practices by multinationals. Destination-based EPTs can address this concern. Estimates suggest that a 10 percent EPT on the globally consolidated accounts of multinationals (on top of the current corporate income tax), with the EPT base being allocated using sales, raises global revenue by 16 percent of corporate income tax revenues. The analysis suggests that international coordination would be desirable to mitigate the risks of profit shifting and tax com petition. Eventually, EPTs could mark an evolution of corporate taxation toward a non-distortionary rent tax.
| JEL Classification Numbers: | E62,H25,H32 |
| Keywords: | Rent Taxes; Destination-based Taxation; Allowance for Corporate Equity; Excess Profits Tax; COVID-19; Windfall Tax |
| Author’s E-Mail Address: | shebous@imf.org; dprihardini@imf.org; nvernon@imf.org |
| JEL Classification Numbers: | E62,H25,H32 |
| Keywords: | Rent Taxes; Destination-based Taxation; Allowance for Corporate Equity; Excess Profits Tax; COVID-19; Windfall Tax |
| Author’s E-Mail Address: | shebous@imf.org; dprihardini@imf.org; nvernon@imf.org |
Title Page
WORKING PAPERS
Excess Profit Taxes: Historical Perspective and Contemporary Relevance
ShafikHebous, Dinar Prihardini, and NateVernon
Contents
Introduction
Excess Profit Taxes: Idea and Origin
Designing an EPT
Revenue Potential of Excess Profits Taxes
Annex I. Gold-Plating and the Impact of a Temporary Excess Profit Tax on Investment
Annex II. A Numerical Example of an Excess Profits Tax
References
FIGURES
Figure 1: Top and Bottom 10 Performer Companies and Industries, Change in Stock Values (%)
Figure 2: Breakdown of Total Profit
Figure 3: Excess Profits as Percent of GDP (Median of Country Group)
Figure 4: Post COVID-19 Excess Profits (Based on Historical Benchmarks): Industry-Specific Results Using
Refinitiv Data
Figure 5: Post COVID-19 Excess Profits (ACE-Based Method): Industry-Specific Results Using Refinitiv Data25
Figure 6: Proxies of Normal and Excess Profit of Multinationals (Global Aggregate)
Figure 7: Revenue from Allocating EPTs on Globally Consolidated Accounts
TABLES
Table 1: Examples of Excess Profits Taxes
Table 2: Databases and Designs of EPTs in the Analysis
Table 3: Revenue Impacts of ACE-Based Unilateral EPT (Using BEA Data on U.S. Multinationals)
Table 4: Gold-Plating under a Temporary EPT
We are very grateful for helpful comments from Thomas Baunsgaard,Cory Hillier, Ruud de Mooij, Michael Keen, Victoria Perry, and Christophe Waerzeggers as well as participants in the annual congress of the National Tax Association and seminar participants at the IMF.