Tax accounting considerations - Solidarity Contribution Tax

On 30 September 2022, EU energy ministers reached a political agreement on a proposal for a Council Regulation to address high energy prices (the proposed Regulation).

The proposed Regulation establishes an emergency intervention to mitigate the effects of high energy prices via exceptional, targeted and time-limited measures. 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 and/or 2023 excess profits generated from activities in the oil, gas, coal and refinery sectors (the Solidarity Contribution Tax).

EU Member States shall now adopt and publish measures implementing the Solidarity Contribution Tax by 31 December 2022. In addition, each Member State shall report to the European Commission (EC) on which fiscal year(s) (i.e., 2022, 2023 or both) the Solidarity Contribution Tax will be applied by 31 December 2022.

What does this mean for your organisation?

Although EU Member States still have to report to the EC on which fiscal year(s) the Solidarity Contribution Tax will be applied, it is clear that the new tax will enter into force before year end 2022.

From a tax accounting perspective, the Solidarity Contribution Tax will be considered as substantively enacted under IFRS at the moment when a relevant Member State has reported their decision on the application of the relevant fiscal year(s) to the EC. Accordingly, companies that report under IFRS should consider the tax accounting implications of the new tax and take these into account for (interim) reporting periods ending on or after that moment, which will be in Q4 2022 (for calendar book years).

Overview of the Solidarity Contribution Tax

A brief overview of the mechanism of the Solidarity Contribution Tax is provided here below.

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 fiscal year 2022 and/or the fiscal year 2023 from activities in the oil, gas, coal and refinery sector as determined under national tax rules, which are above a 20 per cent increase of the average taxable profits generated in the four fiscal years starting on or after 1 January 2018. A negative average annual result leads to average taxable profits being zero.

EU Member States shall report to the EC their decision on the application of the relevant fiscal year(s) (i.e., 2022, 2023 or both) by 31 December 2022.

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. For completeness’ sake, we also note that the preamble mentions that the Member States could arrange for other necessary adjustments in national law. These adjustments could relate to, inter alia, timely collection of the Solidarity Contribution Tax, the tax treatment of the tax (deductible or non-deductible), treatment of losses in previous fiscal years and treatment of shortened fiscal years etc.

Duration (Article 17 of the proposed Regulation)
The Solidarity Contribution Tax shall be of a temporary nature. The duration of the new tax depends on the decision made by the respective EU Member State. The new tax could apply to excess profits generated in the fiscal year 2022, 2023 or both.

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.

Tax accounting considerations

The Solidarity Contribution Tax will likely have tax accounting implications that impact (Interim) Financial Statements once it has been considered as (substantively) enacted for financial accounting purposes. To address these implications, it is important to be aware that the Solidarity Contribution Tax is considered an income tax. As such, it should be accounted for in line with the rules as prescribed within IAS 12 (accounting for income taxes).

(Substantive) enactment
Companies will need to account for the (numerical) impact of the proposed Solidarity Contribution Tax in their (Interim) Financial Statements upon (substantive) enactment of the new tax.

Under IFRS, substantive enactment is achieved when any future steps in the enactment process will not change the outcome. In this respect, ‘will not change’ does not mean ‘can not change’. As the proposed Solidarity Contribution Tax is regulated through a Regulation, the legislative process of an EU Regulation is relevant. The legal basis of the proposed Regulation is Article 122 of the Treaty on the Functioning of the European Union. As such, the proposal requires a qualified majority vote in the Council to be approved. After approval is granted, the proposed Regulation will be formally adopted by written procedure. It will then be published in the EU's Official Journal and enter into force on the next day.

Notwithstanding the political agreement reached on the proposed Regulation on 30 September 2022, the application of the Solidarity Contribution Tax will only be certain when the respective EU Member States have reported their decision on the application of the relevant fiscal year(s) (i.e., 2022, 2023 or both) to the EC. That moment is in our view decisive for substantive enactment of the Solidarity Contribution Tax.

Given the legislative process, EU Member States have to report their decision on the application of the relevant fiscal year(s) by 31 December 2022 at the latest. Therefore, (substantive) enactment of the Solidarity Contribution Tax will take place in Q4 2022 (for calendar book years).

Impact on (Interim) Financial Statements

Accordingly, companies reporting under IFRS will have to take the implications of the Solidarity Contribution Tax into account in their (Q4) 2022 reporting. The impact on the (Interim) Financial Statements is dependent on which fiscal year(s) the new tax will be applied:

If applied on 2022 excess profits only: the new tax will result in an additional current tax impact in Q4 2022;
If applied on 2023 excess profits only: the new tax will result in an additional deferred tax impact in Q4 2022. This entails the deferred tax adjustments for book-to-tax differences that are expected to reverse in 2023;
If applied on 2022 and 2023 excess profits: the new tax will result in an additional current and deferred tax impact in Q4 2022.

In addition, companies should already consider disclosing the impact (if significant) of the Solidarity Contribution Tax in their Q3 (Interim) Financial Statements.