sectoral tax

The Sectoral Tax

Jonáš Baldík
sectoral tax
Although I work in audit and not in the tax advisory, for today’s article I have chosen a topic that is often discussed in the public space nowadays, which is namely the so-called sectoral tax. It might appear that auditing has nothing to do with tax - but in fact, it is quite the opposite, since a (competent) auditor must have a general overview of the economic situation in a particular country, as well as be able to understand the potential risks that their clients might be facing. In this article we will therefore look at what a sectoral tax is and the (dis)advantages related to it.

A sectoral tax is a type of corporate income tax based on which a particular sector of the economy (e.g. banking, telecommunications or energy) is taxed at a higher rate than the standard corporate income tax rate. This tax is often (but not always) imposed on sectors that are heavily regulated by the state, thus subject to strong monopolistic/oligopolistic tendencies. This tax could therefore be seen as a kind of counterbalance to the monopoly advantage of these businesses. Although in the Czech Republic this tax is considered by many to be a left-wing and socialist idea, abroad (including western countries that can hardly be considered socialist, such as the UK) such a tax is either common practice or is currently being introduced. Moreover, this is not the first time that a sectoral tax has been discussed in the Czech Republic - under the government of Andrej Babiš, the Czech Social Democratic Party (ČSSD) advocated (unsuccessfully) such a tax for the banking sector.

Currently, there is discussion concerning the sectoral tax in connection with the energy sector (in particular, the Czech energy giant CEZ is being discussed) in the context of the so-called "windfall tax" - i.e. taxation of unexpected income, which the taxed companies did not contribute to. The main motivation for introduction of such tax is to raise money to help people at risk of so-called energy poverty, i.e. to people who, due to rapidly rising energy prices, would not be able to afford to buy the energy they need to maintain their household consumption. While this argument may seem like a good enough reason, the government is locking the stable door after the horse has bolted - the additional taxation of energy companies (in whatever form and if any) will be reflected in the state budget next year at the earliest - but the money to help the affected households will need to be allocated already this year.

The government is currently divided on the issue of a sectoral tax - four of the five parties in the governing coalition are directly calling for such a tax or are considering it (only ODS is against it), and the National Budget Council supports them in this matter. At the same time, the government has more elegant ways to raise more money for the state budget from "undeserved" profits of companies. For example, there is the possibility of significantly increasing the dividends paid by CEZ, in which the state holds a 70% stake (and can therefore make this decision through the Ministry of Finance). The state budget would not only receive more money from the dividend paid directly to the state, but also 15% of the dividends paid to other shareholders through withholding tax. Moreover, the state would receive this money significantly faster than in the case of the introduction of the new tax, without negatively affecting the minority shareholders of the company - which is one of the arguments of the Prime Minister (and the whole ODS) against the introduction of this tax.

Last but not least, it is necessary to take into account the reaction of CEZ itself (and other energy companies that would be affected by this tax) in order to try to reduce its net profit. It is almost impossible to estimate their reaction, but if we would like to try, we would have to look at the KPIs (key performance indicators) on the basis of which the bonuses for the top management of CEZ are determined. From our point of view, CEZ has two KPIs that could determine the management's reaction - the first is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization), the second is the bonus in so-called performance units. In case the managers' evaluation by EBITDA would prevail, there might be no reaction of CEZ to the new tax - since it is profit before tax, it will not be affected by the new tax. The second KPI is a bit more complicated - the bonus in the form of performance units is a replacement for the cancelled bonus in the form of shares, and in its essence it is some kind of virtual shares - the company's managers receive units as part of the bonus (similar to the way they would receive shares), which the company then pays them back after four years, including four-year dividends according to the current stock exchange price. Should this KPI prevail, CEZ would most certainly react to the sectoral tax - after all, the discussions on the introduction of this tax itself have reduced the share price by 11% - this reaction could, for example, be reflected in the increased tax costs in the prices to the final customers so that the net profit remains unaffected.

That's all we would like to share about the sectoral tax for today. However, we will continue to monitor the situation and will keep you informed if there are any significant changes.

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Tomáš Uvíra
Tomáš Uvíra
Audit Manager

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