Vitor Gaspar, who heads the IMF’s fiscal affairs department, said taxing excess profits could provide permanent revenue for a country’s budget, but the European Union initiative now being considered was “problematic” because it violated tax certainty.

Gaspar, a former Portuguese finance minister, said the IMF believed that the tax system should be clear, predictable and ruled by law, which meant a proposal to tax windfall profits “on profits that have already occurred is a problematic initiative.”

He said the European Commission argued such a solution was appropriate at the moment, given the considerable size of the profits and the need to protect vulnerable people.

But the IMF believed that an ad hoc windfall profits tax would violate the principle of tax certainty. “It is clear that the rules of the game are being changed,” he said in an interview.

European countries are debating whether oil companies making record profits because of the energy crisis triggered by Russia’s invasion of Ukraine should pay additional taxes to help consumers cope with soaring inflation.

French energy company TotalEnergies last month said it was likely to face more than 1 billion euros in additional levies if the EU approved plans to impose extra taxes on oil and gas companies.

In its new Fiscal Monitor, the IMF said a permanent tax on windfall profits from fossil fuel extraction could be considered if another adequate fiscal mechanism was not in place.

Doing so could raise revenues for a government without increasing inflation or reducing investment, and avoided distortions from a temporary tax on windfall profits, it said.

Such measures also allowed for better risk-sharing between government and the private sector, Gaspar said. In the case of the pandemic, for instance, governments boosted fiscal spending to protect the vulnerable, in turn also benefiting businesses.

“The public sector insures society against the downside, but in order for that to be viable, it should participate in the upside as well,” Gaspar said. “An excessive profit tax can help a lot in that endeavor.”

He said the IMF was taking a “detached systemic view” while the European Commission was managing a crisis that threatens to push Europe into recession.

“We don’t know the details,” Gaspar said. “What we are basically discussing at this point in time are possibilities (and) exactly how the policy options will be implemented,” he said.

IMF sees ad hoc taxes on excess profits as ‘problematic’

Source: Reuters