Excess profit tax – raises eyebrows or pulls out eyes

* The money of the companies enriched by the distributed compensations and benefits should be taken for the general interest, the Ministry of Finance proposes*

* Economists point to at least seven reasons against the unexpected increase in corporate burden

“Instead of drawing eyebrows, he will draw eyes”. This folk wisdom is the briefest commentary by businesses and most economists on the new corporate tax that the finance ministry is proposing. The new tax burden is on the “surplus profits” of companies, it says in the changes to the tax laws released for public discussion, which will accompany the Law on the State Budget for 2023. According to them, from July 1, 2023, the payment of a solidarity contribution should be introduced for the excess profits generated in the period from July 1, 2023 to December 31, 2023. The measure is temporary, one-time, its purpose is to preserve the macroeconomic and fiscal stability of the country and control inflation. The draft describes how excess profit is determined. This is done by taking the average realized profit of the companies for the period 2019-2021 and increasing it by 20 percent. Profit above this threshold will be considered excess profit and will be taxed at 33%. The new tax will apply to all companies, as well as those subject to alternative corporate tax and sole traders. From the scope of the measure, the companies that already pay a temporary solidarity contribution are excluded – the companies that process oil.

Motives of the Ministry of Finance

The rationale states that the introduction of a solidarity contribution is an appropriate and proportionate means of dealing with excess profits arising as a result of external and internal political and economic factors. Such are the COVID-19 pandemic, the energy crisis, the military actions in Ukraine, for which financial support was provided by the state, and companies received compensation and assistance in various forms. According to the MoF, the profits realized for this reason exceed the normal profit that the companies would receive under normal circumstances. According to Rositsa Velkova’s department, the measure represents a redistribution in the public interest of realized surplus profits as a result of unexpected market changes and the rapid increase in the prices of all goods and services, despite the measures applied by the state to support and compensate businesses.

BGN 11.2 billion in compensation and assistance to businesses

As a trump card, the Ministry of Finance reports that for the period 2020-2022 BGN 11.2 billion was provided to businesses in the form of aid, compensation and reduced tax rates. BGN 10.3 billion is the total amount of aid and compensation related to the pandemic from COVID-19, the energy crisis and the hostilities in Ukraine, amounting to . They are distributed as follows: for 2020 – BGN 2.1 billion, for 2021 – BGN 2.3 billion, and for 2022 – BGN 5.9 billion. At the same time, in order to support business and reduction or maintenance of the prices of certain goods and services, reduced VAT rates were introduced, as well as exemptions from excise duty. The budgetary effect of the introduced reduced tax rates and exemptions from excise duty for the period 2020 – 2022 is a total loss of BGN 908.7 million, as follows: for 2020 – BGN 94.7 million, for 2021 – BGN 283.5 million, for 2022 – BGN 530.5 million. All this has led to a huge increase in the profits of companies. Declared company taxable profits and taxable sole trader income are increasing significantly for 2021 and 2022, with 2022 profits and income up around 100% compared to 2018 and 2019 profits.

According to NSI data, the distributed profits in the form of dividends are: BGN 21.5 billion for 2020 and BGN 22.4 billion for 2021.

Money accumulates in the banks

Another report proves that the profits of companies and sole traders accumulate in banks. Deposits of non-financial enterprises increased from BGN 29.3 billion in 2020 to BGN 40.2 billion in 2022, which is an increase of BGN 10.9 billion (see table).

An increase was also observed in the availability of household deposits by BGN 11 billion for 2022 compared to 2020. However, there is another indicative trend here – the total number of household deposits decreased by 470,199 in 2022. compared to 2020

The arguments against the introduction of this tax

The new “surplus profit” tax will have a negative effect, economists are categorical. They also provide arguments to support this claim:

1. Unpredictability

Mid-year tax law changes that are made piecemeal disrupt the predictability of the environment. According to Shteryu Nozharov, the economic advisor of the Bulgarian Chamber of Commerce (BCC), they are sending an extremely bad signal to investors, and the repercussions of this action may continue for the next 10 years.

2. Companies will flee

The imposition of such a tax may drive out of our country companies that may have really generated excess profits – for example, IT companies. It is not a problem for them to move their headquarters to another country within the EU. However, our country will only lose from this.

3. Punishing the enterprising

If the tax is for all companies, it is a serious increase in the tax burden of the successful ones as well – those who have not necessarily achieved a higher profit because of the economic situation, but also probably because of innovation, investment, increased productivity, opening of new markets, etc. in 2022, says Lachezar Bogdanov from the Institute for Market Economy. According to him, it seems schizophrenic that the state will pour 8 billion to businesses in 2022, while at the same time the government is now thinking about how to tax them.

4. The state gives to some and takes from others

The state wants to take money not only from those who received funds from the budget, but also from others who did not receive anything and managed by themselves. This creates inequality, says Georgi Angelov from “Open Society”.

5. Hit small business

The “excess profit” tax is a rather shocking measure, it will have a bad effect on small and medium-sized companies, which were affected the most during the pandemic and closures, is the opinion of former Deputy Prime Minister Lidiya Shuleva. According to her, it is unfair to deprive them of the increase they would have, after they have barely managed to recover their indicators from before the pandemic.

6. Then they will return money

Such a horizontal taxation of all excess profits will have unpredictable consequences, as it will hit a variety of businesses, from small to large. And it will hit them already in the second half of 2023, because the excess profit will be taxed for the current year, but it will be paid in advance on the basis of 2022, when the big profit is, and then you will have to return money, commented Petar Ganev from IPI.

7. Possibility of corruption

The greater the taxes, the greater the redistributive function of the state. And the power to redistribute other people’s money brings out the worst. You redistribute a billion in taxes and you are the official who has to say who the money should be. How do you decide? There are supposedly some objective criteria. Any redistribution inevitably leads to corruption, is the opinion of businessman Ivaylo Penchev.