## Introduction

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### Background and Resurgence of Interest in EPTs
- Historical origin: “excess profits taxes” (EPTs) levied following World War I in several European countries, Canada, and the United States.
- Recent triggers for renewed interest:
  - COVID-19 pandemic (some scholars calling for EPTs on revenue and redistribution grounds).
  - Russia’s war in Ukraine and the surge in energy prices producing windfall profits in power and extractives sectors.
- Recent policy actions (examples):
  - UK announced a temporary tax on windfall profits of oil and gas producers (May 2022).
  - Greece and Romania introduced temporary taxes on electricity generators in late 2021 and 2022.
  - Hungary introduced a temporary tax on certain electricity generators for 2022 and 2023.
  - Spain is considering an EPT on banks and utilities.

### Definition, Measurement Approaches, and Practical Proxies
- Conceptual equivalence: “excess profit” ≈ economic rent = returns in excess of the opportunity cost of the investment (returns above risk-adjusted ‘normal’ returns).
- Related terms:
  - “Windfall profit”: fortuitous gains from unanticipated events; may be a portion of excess profit.
  - “Residual profit” and “routine profit”: routine profit ≈ normal return; residual profit ≈ economic rent/excess profit.
- Practical measurement proxies:
  - Mark-ups above fixed returns to equity or total assets.
  - Profitability relative to prior years.
- Two feasible empirical computation forms (paper references exact formulations):
  - ACC-based (allowance on total assets).
  - ACE-based (allowance on equity).
- Typical allowance rates used in practice and simulations:
  - Historical EPT allowance examples: 8 percent in US WWI/WWII EPTs; 10 percent in some recent measures.
  - Simulations in the paper set allowance rate r = 10 percent.

### Sources of Economic Rent and Existing Practices
- Sources:
  - Firm-specific (monopolistic power; many are multinational enterprises).
  - Location-specific (extractives, national assets, parts of telecommunications).
- Existing extractives practice:
  - At least 32 countries have EPTs in the extractive sector.
  - Typical summary statistics: average EPT rate is 25 percent; threshold of 14 percent; average top EPT rate is 58 percent; top profitability threshold of 28 percent.
- Extractive-sector examples:
  - Australia’s Petroleum Resource Rent Tax: cashflow tax of 40 percent with losses carried forward at the long-term bond rate plus five percent and no financing cost deductions.
  - Ghana’s Additional Oil Entitlement (AOE): cashflow tax with uplift on losses; multiple tax tiers; parameters biddable at the contract/license level.
  - Norway’s Special Petroleum Tax: rate is 56 percent; additional deduction of 21 percent of capital costs; limited interest deduction; losses carried forward at the risk-free interest rate.
  - UK’s Supplementary Charge: 10 percent on extraction profits (with investment and new field allowances).

### Design Options: ACC and ACE as Efficient EPTs
- Efficiency objective:
  - EPTs can, in principle, be designed as a permanent efficient rent tax.
  - ACC (Allowance for Corporate Capital) or ACE (Allowance for Corporate Equity) can restore neutrality by providing deductions for normal returns irrespective of financing mode.
- Core theoretical points (exact expressions preserved in source):
  - Taxing pure economic rent at rate τ is non-distortionary and leaves the optimality condition Y_K = P + δ unaffected.
  - Corporate income tax that disallows deduction of Pδ raises the cost of capital; example outcome expressed as Y_K = δ + P/(1−τ).
- Practical design implications:
  - ACC-alike EPT: allowance based on assets; deducted from EBIT.
  - ACE-alike EPT: allowance based on equity; deducted from pre-tax profits (after interest deductions).
  - If allowance rate r > normal return r (intentionally capturing only windfalls), EPT can have negative marginal tax rate (“gold-plating”) and distort investment timing.
- Treatment of losses:
  - If negative excess profits (losses) are carried forward with uplift equal to r or refunded, EPT remains neutral to investment.
  - Without uplift/refund, normal returns can be effectively taxed and investment neutrality is lost.

### Temporary versus Permanent EPTs
- Temporary EPT:
  - Motivated to meet extraordinary financing needs after large adverse shocks; supports social cohesion by taxing beneficiaries of high prices.
  - Risks: affecting investment decisions, timing (gold-plating), and financial structure (debt-equity composition changes).
- Permanent EPT:
  - Two broad arguments in favor:
    - Structural efficiency: eliminates debt bias in corporate taxation.
    - Avoids investment-timing distortions inherent in temporary designs.
  - In a first-best scenario, ACC-alike EPT would gradually replace corporate income tax (CIT), converging toward zero-tax on normal return while taxing excess profit.
- Practical note:
  - If first-best not attainable, a temporary EPT on top of CIT remains an important option, but with cautions on efficiency impacts.

### Interaction with Existing Corporate Income Tax (CIT)
- Coexistence when temporary:
  - Portion of profits subject to EPT would not be taxed under CIT; remaining profits taxed under CIT.
  - Example (Annex II): pre-tax profits 44,000, excess profits 20,000 → EPT on 20,000; CIT on 24,000.
  - EPT can be structured either by crediting any paid CIT on excess profits against the EPT or by designing the EPT as a surcharge on CIT.
- EPT tax rate:
  - Does not need to equal statutory CIT rate; historically EPT rates have been much higher (e.g., up to 95 percent in the United States).
  - International pressures (profit shifting and tax competition) constrain feasible unilateral EPT rates.

### Avoidance, Base Erosion, and Asset Valuation Challenges
- Non-exclusive avoidance strategies to guard against:
  - Splitting into multiple companies.
  - Changing headquarter location (inversion).
  - Mergers & acquisitions with loss-making firms.
  - Inflating asset book values to raise allowance and narrow base.
  - Profit shifting to low-tax jurisdictions to erode domestic EPT base.
- Implementation vulnerability:
  - Mobile and hard-to-price intangible assets (patents, trademarks) complicate asset valuation and EPT base robustness.

### Unilateral versus Coordinated (Global) EPT Designs
- Unilateral approaches for multinationals:
  - Imposing EPT on unconsolidated affiliate accounts (asset/location-based): vulnerable to base erosion.
  - Imposing EPT on globally consolidated accounts and apportioning to countries (e.g., by sales by destination): more robust to profit shifting but may infringe tax treaties and existing legal norms.
- Coordinated EPT benefits:
  - Coordinated EPT on consolidated accounts alleviates base erosion and tax competition concerns.
  - Coordinated approach becomes formulary apportionment, allocating excess profits (economic rent) to market/destination countries—sharing kinship with Pillar 1 concepts.
- Empirical coordinated-impact findings (exact statements preserved):
  - If excess profit of multinationals is globally consolidated and allocated to countries based on a formula to replace the existing corporate income tax on the excess profit, then global tax revenue increases by over 4 percent of current global corporate income tax revenue.
  - Resulting increase in the global effective tax rate is about 2.6 percent.
  - Alternatively, if the EPT is imposed at 10 percent globally and allocated to countries on top of existing corporate income taxes on excess profit, the increase in global revenue is about 16 percent of current global corporate income tax revenue.

### Data, Measurement, and Empirical Exercises
- Data sources used across the paper:
  - U.S. Bureau of Economic Analysis (BEA) — unilateral, ACE-based, profits exceeding average prior years.
  - Country-by-country reports, OECD Statistics — unilateral, ACE-based.
  - Refinitiv — coordinated, ACE-based, profits exceeding average prior years.
  - S&P Capital IQ — coordinated, ACC-based.
- Refinitiv coverage and sample:
  - Covers publicly traded companies representing 99 percent of global market capitalization.
  - Consolidated profits for 2020 available from annual financial statements.
  - Sample focuses on companies with market capitalization greater than USD 2 billion; after filtering for equity data availability the sample comprises 3,000 companies.
- S&P Capital IQ global figures:
  - At the global level in 2020, multinational profit reached USD 7.9 trillion (9.2 percent of world GDP).
  - Energy sector and financials together constitute 25 percent of global multinational profit.
  - Profit concentration: 42 percent of profit is earned by the 400 firms with the highest earnings (1 percent of the sample); 80 percent of total profit is earned by 4,000 firms (10 percent of the sample).
  - Extractives are dropped from parts of the analysis due to sector specificity.
- Allowances and rates in simulations:
  - Allowance rate for ACE- or ACC-based EPTs set at 10 percent.
  - Examples and illustrations use an EPT rate of 20 percent in specific numerical examples.

### Key Simulation Results — Unilateral and Industry Patterns (Refinitiv)
- Historical-benchmark EPT (normal return = average profits 2015–2019):
  - Water transportation: approximately 34 percent of total profits considered excess.
  - Other high-share industries: non-store retailers, ambulatory health care, couriers and messengers, other information services (including large U.S. tech firms).
  - Industries with no excess profits in 2020 (pandemic-affected): air transportation, ground passenger transportation, accommodation.
- ACE-based EPT (10 percent allowance on equity):
  - Broader set of industries exhibit excess profits and more than doubles the size of excess profits compared to the historical-benchmark definition.
  - High-share industries include trade contractors, home improvement (furniture, building and garden materials), food and beverage sectors; couriers and messengers remain high under both definitions.
  - In absolute dollar terms, the extractive sector remains the largest contributor to the EPT base; second largest contributor are non-store retailers, followed by telecommunications.

### Key Simulation Results — Globally Coordinated EPTs (S&P Capital IQ; consolidated accounts)
- Global aggregate excess profit (excluding extractives) average: USD 4 trillion (range USD trillion 2.9 to 6.1).
- Banks and financials (out of USD 0.8 trillion of global profit for the sector):
  - 9 percent can be excess if a ratio of tangible assets is used.
  - 40 to 60 percent excess under the revenue mark-up definition.
- Allocation and revenue impact scenarios (ACC-based EPT with 10 percent allowance on assets):
  - If EPT replaces existing corporate income tax on excess profit and allocation uses formulae, global tax revenue increases by over USD 100 billion (an increase of 4 percent of current global corporate income tax revenue).
  - Resulting increase in the global effective tax rate is between 1.6 and 2.6 percent, depending on allocation formula.
  - If a 10 percent EPT is imposed globally on top of existing corporate income taxes and allocated via formula, global revenue increases by USD 400 billion (an increase of 16 percent of current global corporate income tax revenue).
- Distributional effects:
  - In the “10 percent on top of” scenario, no country loses tax base.
  - In the “replacing” scenario, some major profit and FDI hubs see revenue declines.
  - Advanced countries would raise revenues from EPTs between 4 and 15 percent.
  - Low-income countries favor allocation keys based on employment or assets: EPTs would raise revenue by a magnitude ranging from 12 to 18 percent of current corporate income taxes.
- Estimates are static and do not consider firm behavioral responses.

### Policy Implications and Recommendations
- Rationale:
  - Taxing excess or windfall profits can meet extraordinary financing needs and support social cohesion during the global pandemic and the energy price surge following Russia’s war in Ukraine.
- Design guidance:
  - EPT can be implemented as ACC or ACE, defining excess profit as returns above a predetermined percent of assets or equity.
  - If excess profit is location-specific, EPT should be at source; if firm-specific, EPT can be at source or follow the destination-based principle.
  - Combining ACC/ACE with destination-based allocation addresses cross-border spillovers and profit shifting.
  - Coordinated EPT can operate as formulary apportionment consolidating multinational excess profit globally and allocating it to countries based on sales by destination—conceptually similar to Pillar 1.
- Implementation considerations:
  - Temporary add-on to existing CIT covering the entire economy is feasible if objective is revenue only.
  - If objective includes efficiency, an EPT could be a gateway to a permanent tax replacing CIT in the long term.
  - Temporary or permanent EPTs face international pressures from profit shifting and tax competition similar to current CIT.

### Annex Highlights — Investment Effects and Numerical Example
- Gold-plating and temporary EPT (two-period illustrative model):
  - Three tax scenarios: (1) no EPT, (2) permanent EPT of 20 percent, (3) temporary EPT of 20 percent in period 1 and 0 percent in period 2.
  - Three investment scenarios: (A) no new investment, (B) breakeven investment after corporate income tax (NPV 0), (C) unprofitable after corporate income tax (NPV −10).
  - Temporary EPT can incentivize investment that would otherwise be unprofitable after corporate income tax because firms receive tax savings in the EPT period and avoid EPT in subsequent periods once terminated.
- Numerical example (Annex II):
  - Total assets = $1 million ($600,000 debt + $400,000 equity).
  - EBIT = $120,000; interest expense = $60,000 (0.1 × $600,000); pre-tax profits = $60,000.
  - EPT rate = 20 percent.
  - ACC-based EPT:
    - ACC allowance = $100,000 (10 percent of assets).
    - Excess profit subject to EPT = $120,000 − $100,000 = $20,000.
    - EPT revenue = 20 percent of $20,000 = $4,000.
  - ACE-based EPT:
    - ACE allowance = $40,000 (10 percent of equity).
    - Excess profit subject = $60,000 − $40,000 = $20,000.
    - EPT revenue = 20 percent of $20,000 = $4,000.
  - Note: ACC- and ACE-based EPTs need not be identical if interest rate on debt differs from allowance rate for equity.

_Italic: Source — wpiea2022187-print-pdf - Introduction (IMF Working Paper excerpt)._

### Introduction............................................................................................................

### Introduction

### Table of contents (sections under the Introduction unit)
- Introduction......................................................................................................................................................................... 3
- Excess Profit Taxes: Idea and Origin ........................................................................................................................... 7
- Designing an EPT ............................................................................................................................................................ 12
- Revenue Potential of Excess Profits Taxes.............................................................................................................. 18
- Annex I. Gold-Plating and the Impact of a Temporary Excess Profit Tax on Investment ............................. 29
- Annex II. A Numerical Example of an Excess Profits Tax..................................................................................... 30
- References ........................................................................................................................................................................ 31

### Figures referenced in this unit
- 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 Data
- Figure 6: Proxies of Normal and Excess Profit of Multinationals (Global Aggregate)
- Figure 7: Revenue from Allocating EPTs on Globally Consolidated Accounts

### Tables referenced in this unit
- 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

### Document identification
- IMF WORKING PAPERS Excess Profits Taxes
- INTERNATIONAL MONETARY FUND
- Page indicator shown: 3

*Source: wpiea2022187-print-pdf - Introduction*

### Introduction

### Introduction

### Background and Resurgence of Interest in EPTs
- Historical origin: “excess profits taxes” (EPTs) levied following World War I in several European countries, Canada, and the United States.
- Recent triggers for renewed interest:
  - COVID-19 pandemic (some scholars calling for EPTs on revenue and redistribution grounds).
  - Russia’s war in Ukraine and the surge in energy prices producing windfall profits in power and extractives sectors.
- Recent policy actions (examples):
  - UK announced a temporary tax on windfall profits of oil and gas producers (May 2022).
  - Greece and Romania introduced temporary taxes on electricity generators in late 2021 and 2022.
  - Hungary introduced a temporary tax on certain electricity generators for 2022 and 2023.
  - Spain is considering an EPT on banks and utilities.

### What Is “Excess Profit” and Measurement Approaches
- Conceptual equivalence: “excess profit” ≈ economic rent = returns in excess of the opportunity cost of the investment (returns above risk-adjusted ‘normal’ returns).
- Related terms:
  - “Windfall profit”: fortuitous gains from unanticipated events; may be a portion of excess profit.
  - “Residual profit” and “routine profit” (recent policy debate): routine profit ≈ normal return; residual profit ≈ economic rent/excess profit.
- Practical measurement proxies presented:
  - Mark-ups above fixed returns to equity or total assets.
  - Profitability relative to prior years.
- Two feasible empirical computation forms (exact formulations referenced in the paper):
  - ACC-based (allowance on total assets).
  - ACE-based (allowance on equity).

### Sources of Economic Rent and Existing Practices
- Sources:
  - Firm-specific (monopolistic power; many are multinational enterprises).
  - Location-specific (extractives, national assets, parts of telecommunications).
- Existing extractives practice:
  - At least 32 countries have EPTs in the extractive sector.
  - Typical summary statistics: average EPT rate is 25 percent; threshold of 14 percent; average top EPT rate is 58 percent; top profitability threshold of 28 percent.
- Examples of extractive-sector EPTs:
  - Australia’s Petroleum Resource Rent Tax: cashflow tax of 40 percent with losses carried forward at the long-term bond rate plus five percent and no financing cost deductions.
  - Ghana’s Additional Oil Entitlement (AOE): cashflow tax with uplift on losses; multiple tax tiers; parameters biddable at the contract/license level.
  - Norway’s Special Petroleum Tax: rate is 56 percent; additional deduction of 21 percent of capital costs; limited interest deduction; losses carried forward at the risk-free interest rate.
  - UK’s Supplementary Charge: 10 percent on extraction profits (with investment and new field allowances).

### Design Options: Efficient EPT as an ACC/ACE
- Efficiency objective:
  - EPTs can, in principle, be designed as a permanent efficient rent tax.
  - ACC (Allowance for Corporate Capital) or ACE (Allowance for Corporate Equity) can restore neutrality by providing deductions for normal returns irrespective of financing mode.
- Core theoretical points (preserve exact expressions and implications):
  - Taxing pure economic rent at rate τ is non-distortionary and leaves the optimality condition Y_K = P + δ unaffected.
  - Corporate income tax that disallows deduction of Pδ raises the cost of capital; example outcome expressed as Y_K = δ + P/(1−τ).
- Practical design implications:
  - ACC-alike EPT: allowance based on assets; deducted from EBIT.
  - ACE-alike EPT: allowance based on equity; deducted from pre-tax profits (after interest deductions).
  - Allowance rate r is predetermined in practice (historical examples: 8 percent in US WWI/WWII EPTs; 10 percent in some recent measures).
  - If allowance rate r > normal return r (intentionally capturing only windfalls), EPT can have negative marginal tax rate (“gold-plating”) and distort investment timing.
- Treatment of losses:
  - If negative excess profits (losses) are carried forward with uplift equal to r or refunded, EPT remains neutral to investment.
  - Without uplift/refund, normal returns can be effectively taxed and investment neutrality is lost.

### Temporary versus Permanent EPTs
- Temporary EPT:
  - Motivated to meet extraordinary financing needs after large adverse shocks; supports social cohesion by taxing beneficiaries of high prices.
  - Risks include affecting investment decisions, timing (gold-plating), and financial structure (debt-equity composition changes).
- Permanent EPT:
  - Two broad arguments in favor:
    - Structural efficiency: eliminates debt bias in corporate taxation.
    - Avoids investment-timing distortions inherent in temporary designs.
  - In a first-best scenario, ACC-alike EPT would gradually replace corporate income tax (CIT), converging toward zero-tax on normal return while taxing excess profit.
- Practical note:
  - If first-best not attainable, a temporary EPT on top of CIT remains an important option, but with cautions on efficiency impacts.

### Interaction with the Existing Corporate Income Tax
- Coexistence when temporary:
  - Portion of profits subject to EPT would not be taxed under CIT; remaining profits taxed under CIT.
  - Example (from Annex II): pre-tax profits 44,000, excess profits 20,000 → EPT on 20,000; CIT on 24,000.
  - EPT can be structured either by crediting any paid CIT on excess profits against the EPT or by designing the EPT as a surcharge on CIT.
- EPT tax rate:
  - Does not need to equal statutory CIT rate; historically EPT rates have been much higher (e.g., up to 95 percent in the United States).
  - International pressures (profit shifting and tax competition) constrain feasible unilateral EPT rates.

### Avoidance, Base Erosion, and Asset Valuation Challenges
- Non-exclusive avoidance strategies to guard against:
  - Splitting into multiple companies.
  - Changing headquarter location (inversion).
  - Mergers & acquisitions with loss-making firms.
  - Inflating asset book values to raise allowance and narrow base.
  - Profit shifting to low-tax jurisdictions to erode domestic EPT base.
- Implementation vulnerability:
  - Mobile and hard-to-price intangible assets (patents, trademarks) complicate asset valuation and EPT base robustness.

### Unilateral versus Coordinated (Global) EPT Designs
- Two unilateral approaches for multinationals:
  - Imposing EPT on unconsolidated affiliate accounts (asset/location-based): vulnerable to base erosion via profit shifting and intangible assets.
  - Imposing EPT on globally consolidated accounts and apportioning to countries (e.g., by sales by destination): more robust to profit shifting but may infringe tax treaties and existing legal norms.
- Coordinated EPT benefits:
  - Coordinated EPT on consolidated accounts alleviates base erosion and tax competition concerns.
  - A coordinated approach becomes formulary apportionment, allocating excess profits (economic rent) to market/destination countries—sharing kinship with Pillar 1 concepts.
  - Paper notes similarity to Pillar 1: Pillar 1 defines “residual” profit above 10 percent of global revenues and allocates 25 percent to market countries; EPT could extend scope to entire excess profit and all firms.
- Possible revenue and effective tax rate impacts from consolidated-and-allocated designs (empirical finding stated exactly):
  - If excess profit of multinationals is globally consolidated and allocated to countries based on a formula to replace the existing corporate income tax on the excess profit, then global tax revenue increases by over 4 percent of current global corporate income tax revenue.
  - Resulting increase in the global effective tax rate is about 2.6 percent.
  - Alternatively, if the EPT is imposed at 10 percent globally and allocated to countries on top of existing corporate income taxes on excess profit, the increase in global revenue is about 16 percent of current global corporate income tax revenue.

### Empirical Exercises and Revenue Impact (Summary of Findings)
- Data sources used across the paper:
  - U.S. Bureau of Economic Analysis (BEA) — unilateral, ACE-based, profits exceeding average prior years.
  - Country-by-country reports, OECD Statistics — unilateral, ACE-based.
  - Refinitiv — coordinated, ACE-based, profits exceeding average prior years.
  - S&P Capital IQ — coordinated, ACC-based.
- Common empirical assumptions:
  - Allowance rate set to 10 percent in all exercises.
  - EPT rate in many exercises taken equal to current statutory corporate income tax rate; one exercise simulates an EPT of 10 percent on top of CIT.
  - Analyses include only multinationals (domestic firms excluded in datasets).
- Key unilateral ACE-based findings using BEA (U.S. multinationals abroad):
  - Around 20 countries in the 51-country BEA sample would have positive excess profits.
  - Between 2016 and 2018, around half of excess profits are in Asia Pacific; average return on net equity in Asia Pacific between 12-13 percent (above the 10 percent allowance).
  - Largest excess profits concentrated in investment hubs known for profit shifting.
  - For some investment-hub countries, imposing an EPT at the current corporate income tax rate on U.S. multinationals would increase revenue from these firms by over 100 percent (around 0.6 – 1.5 percent of GDP). These are upper-bound static estimates (do not account for behavioral relocation).
  - Defining excess profits as profits exceeding the average of the last four years reduces the aggregate tax base by about 20 percent and estimated revenue by approximately 25 percent relative to the ACE-based EPT.
- Country-by-country (CbC) ACE-based findings:
  - CbC reports cover multinationals with global revenue exceeding EUR 750 million; data limitations include intracompany dividends and lack of equity investment adjustments.
  - In 2017, countries showing largest excess profits included a mix of large economies and investment hubs with excess profit ranges between 0.15 percent of GDP and over 1000 percent of GDP.
  - Median investment hub excess profit ≈ 1.9 percent of GDP. Applying statutory income tax rates to excess profits yields median investment hub revenue gain ≈ 0.3 percent of GDP.
  - Median low-income country has very low excess profits (0.01 percent of GDP).
- Coordination result highlight:
  - Using consolidated accounts and apportionment increases robustness to profit shifting and can substantially raise global revenue (see coordinated impacts above).

### Policy Implications and Recommendations
- Design must reflect objectives:
  - Temporary EPT: raise revenues from highly profitable firms during significant adverse shocks; be mindful of investment-timing and financial-structure distortions.
  - Permanent EPT (ACC/ACE): structurally restore efficiency by eliminating debt bias and taxing only economic rent; could serve as transition toward replacing CIT.
- Legal and administrative considerations:
  - Careful preparation and legal drafting are required to address potential treaty and implementation challenges, especially for consolidated-account designs and destination-based apportionment.
  - Integration with existing tax policy and treaty positions is necessary to reduce disputes and ensure harmonization of apportionment rules.
- Interaction with broader reform agenda:
  - EPTs conceptually align with and can extend elements of Pillar 1 and Pillar 2 debates; coordinated EPTs with destination-based allocation can reduce profit shifting and tax competition.
  - Unilateral EPTs may be defensible as interim steps toward coordinated reform but face erosion risks without international coordination.

_Italic: Source — wpiea2022187-print-pdf - Introduction (IMF Working Paper excerpt)._

### 0.04 percent of GDP, the median upper middle-income country would raise 0.03 percent of GDP, and the

### wpiea2022187-print-pdf - 0.04 percent of GDP, the median upper middle-income country would raise 0.03 percent of GDP, and the

### Data and measurement
- BEA-based and OECD country-by-country report data are used to estimate unilateral ACE-based EPT revenue impacts; data do not include the recent episode of surging energy prices.
- Refinitiv database:
  - Covers publicly traded companies representing 99 percent of global market capitalization.
  - Consolidated profits for 2020 available from annual financial statements.
  - Sample focuses on companies with market capitalization greater than USD 2 billion; after filtering for equity data availability the sample comprises 3,000 companies.
- S&P Capital IQ:
  - Consolidated accounts of the largest 40,000 (public and private) global companies.
  - At the global level in 2020, multinational profit reached USD 7.9 trillion (9.2 percent of world GDP).
  - Energy sector and financials together constitute 25 percent of global multinational profit.
  - Profit concentration: 42 percent of profit is earned by the 400 firms with the highest earnings (1 percent of the sample); 80 percent of total profit is earned by 4,000 firms (10 percent of the sample).
  - Extractives are dropped from parts of the analysis due to sector specificity.
- Allowance and rates used in simulations:
  - Allowance rate for ACE- or ACC-based EPTs set at 10 percent.
  - Examples and illustrations use an EPT rate of 20 percent in specific numerical examples.

### Measurement and estimation methods
- Two Refinitiv-based EPT definitions:
  - Historical-benchmark EPT: normal return = average profits between 2015 and 2019; EPT base = profits above that average.
  - ACE-based EPT: uses profits and shareholder equity with a 10 percent allowance on equity.
- S&P Capital IQ ACC-based exercise:
  - ACC allowance = 10 percent of total worldwide consolidated assets.
  - Global EPT computed and then allocated to countries using allocation keys (sales by destination; production-based: assets, employment, payroll; and an equal-weight formula of assets, sales, and labor).
  - Revenue computed by multiplying allocated tax base with current corporate income tax rates.
- Proxies for normal return considered (global aggregate, excluding extractives):
  - (i) 5-10 percent of tangible assets,
  - (ii) 5-10 percent of cost of goods sold,
  - (iii) 5-10 percent of turnover (revenue).

### Key simulation results — Unilateral EPTs and industry patterns (Refinitiv)
- Using 4-year pre-pandemic average profits as benchmark (historical benchmark):
  - High shares of excess profits (approximately 34 percent of total profits) observed in water transportation.
  - Other high-share industries: non-store retailers, ambulatory health care, couriers and messengers, other information services (including large U.S. tech firms).
  - Industries with no excess profits in 2020 (pandemic-affected): air transportation, ground passenger transportation, accommodation.
- Using ACE-based definition (10 percent allowance on equity):
  - Broader set of industries exhibit excess profits and more than doubles the size of excess profits compared to the historical-benchmark definition.
  - High-share industries include trade contractors, home improvement (furniture, building and garden materials), food and beverage sectors; couriers and messengers remain high under both definitions.
  - In absolute dollar terms, the extractive sector remains the largest contributor to the EPT base; second largest contributor are non-store retailers, followed by telecommunications.

### Key simulation results — Globally coordinated EPTs (S&P Capital IQ; consolidated accounts)
- Global aggregate excess profit (excluding extractives) average: USD 4 trillion (range USD trillion 2.9 to 6.1).
- Banks and financials (out of USD 0.8 trillion of global profit for the sector):
  - 9 percent can be excess if a ratio of tangible assets is used,
  - 40 to 60 percent excess under the revenue mark-up definition.
- Allocation and revenue impact scenarios (ACC-based EPT with 10 percent allowance on assets):
  - If EPT replaces existing corporate income tax on excess profit and allocation uses formulae, global tax revenue increases by over USD 100 billion (an increase of 4 percent of current global corporate income tax revenue).
  - Resulting increase in the global effective tax rate is between 1.6 and 2.6 percent, depending on allocation formula.
  - If a 10 percent EPT is imposed globally on top of existing corporate income taxes and allocated via formula, global revenue increases by USD 400 billion (an increase of 16 percent of current global corporate income tax revenue).
- Distributional effects across countries:
  - In the “10 percent on top of” scenario, no country loses tax base.
  - In the “replacing” scenario, some major profit and FDI hubs see revenue declines.
  - Advanced countries would raise revenues from EPTs between 4 and 15 percent.
  - Low-income countries favor allocation keys based on employment or assets: EPTs would raise revenue by a magnitude ranging from 12 to 18 percent of current corporate income taxes.
  - Investment hubs unambiguously collect less revenues from excess profits under consolidated-account allocation because starting point is consolidated accounts rather than country-reported profits.
- Estimates are static and do not consider firm behavioral responses.

### Policy analysis and conclusions
- Rationale:
  - A case can be made for taxing excess or windfall profits to meet extraordinary financing needs and support social cohesion during the global pandemic and the energy price surge following Russia’s war in Ukraine.
- Design insights:
  - An EPT can be implemented as an allowance for corporate capital (ACC) or equity (ACE), defining excess profit as returns above a predetermined percent of assets or equity.
  - If excess profit is location-specific, EPT should be at source; if firm-specific, EPT can be at source or follow the destination-based principle.
  - Combining an allowance for corporate capital or equity with the destination-based principle addresses cross-border spillovers and profit shifting.
  - Conceptually, an EPT can be a form of formulary apportionment consolidating multinational excess profit globally and allocating it to countries based on sales by destination — similar to Pillar 1 concepts of the 2021 Inclusive Framework agreement.
- Implementation considerations:
  - If the objective is revenue only, a temporary add-on to existing corporate income taxes covering the entire economy is feasible.
  - If the objective also includes efficiency, an EPT could be a gateway to a permanent tax replacing corporate income tax in the long term.
  - Temporary or permanent EPTs would face international pressures due to profit shifting and tax competition similar to current corporate income tax.

### Annex highlights — Investment effects and numerical example
- Gold-plating and temporary EPT (two-period illustrative model):
  - Three tax scenarios: (1) no EPT, (2) permanent EPT of 20 percent, (3) temporary EPT of 20 percent in period 1 and 0 percent in period 2.
  - Three investment scenarios: (A) no new investment, (B) breakeven investment after corporate income tax (NPV 0), (C) unprofitable after corporate income tax (NPV -10).
  - Temporary EPT can incentivize investment that would otherwise be unprofitable after corporate income tax because firms receive tax savings in the EPT period and avoid EPT in subsequent periods once terminated.
- Numerical example (Annex II):
  - Total assets = $1 million ($600,000 debt + $400,000 equity).
  - EBIT = $120,000; interest expense = $60,000 (0.1 × $600,000); pre-tax profits = $60,000.
  - EPT rate = 20 percent.
  - ACC-based EPT:
    - ACC allowance = $100,000 (10 percent of assets).
    - Excess profit subject to EPT = $120,000 – $100,000 = $20,000.
    - EPT revenue = 20 percent of $20,000 = $4,000.
  - ACE-based EPT:
    - ACE allowance = $40,000 (10 percent of equity).
    - Excess profit subject = $60,000 – $40,000 = $20,000.
    - EPT revenue = 20 percent of $20,000 = $4,000.
  - Note: ACC- and ACE-based EPTs need not be identical if interest rate on debt differs from allowance rate for equity.

*IMF WORKING PAPERS Excess Profits Taxes — INTERNATIONAL MONETARY FUND*

### Chapter 2, April 2019.

### Chapter 2 — Excess Profit Taxes (April 2019)

### Major themes in the referenced literature
- Historical implementations of excess-profits and wartime profit taxation:
  - Plehn, Carl C., 1920, “War Profits and Excess Profits Taxes,” American Economic Review, 10, 283–298.
  - Stamp, J. C., 1917, “The Taxation of Excess Profits Abroad,” Economic Journal, 27(105), 26–37.
  - Musgrave, R., and H. Seligman, 1944, “The Wartime Tax Effort in the United States, the United Kingdom, and Canada,” Federal Reserve Bulletin, January.
  - Ratchford, B. U., 1945, “The Federal Excess Profits Tax. Part One: Development and Present Status,” Southern Economic Journal, 12(1), 1–16.
  - Keith, Gordon, 1951, “The Excess Profits Tax Act of 1950,” National Tax Journal, 4(3), 193–207.
  - Lent, George E., 1951, “Excess-Profits Taxation in the United States”, Journal of Political Economy, 59(6): 481–497.
  - Pruefer, Clifford H., 1941, “The Excess Profits Tax and Defense Financing,” Southern Economic Journal, 8(1): 40-53.
  - Tolmie, J. Ross, and Campbell W. Leach, 1941, “Excess Profits Taxation,” Canadian Journal of Economics and Political Science, 7(3), 350–70.

- Economic analysis of corporate taxation and firm responses:
  - Jacob, Martin, 2021, “Real Effects of Corporate Taxation: A Review,” European Accounting Review, 31: 269–296.
  - Rao, Nirupama L., 2018. "Taxes and US Oil Production: Evidence from California and the Windfall Profit Tax." American Economic Journal: Economic Policy, 10 (4), 268–301.
  - Keen, Michael, and Joel Slemrod, 2021, Rebellion, Rascals, and Revenue: Tax Follies and Wisdom through the Ages, Princeton University Press.
  - Mirrlees, James et al., 2011, “Tax by Design,” Oxford University Press.

- Policy design, legal considerations, and contemporary tax instruments:
  - Waerzeggers, Christophe J, and Cory Hillier, 2021, “Tax Law Design Considerations When Implementing Taxing Instruments to Support the Recovery From COVID-19,” IMF Special Series on Tax Law Design Issues to Respond to COVID-19, April 2021.
  - IMF, 2021a, “Policies to Support People During the COVID-19 Pandemic,” Fiscal Monitor, April 2020.
  - IMF, 2021b, “COVID-19 Recovery Contributions,” Fiscal Affairs Department Special Series on COVID-19.
  - PBO, 2021, Cost Estimate of An Excess Profits Tax, Canadian Parliamentary Budget Officer, April, 2021.

- International and cross-border taxation topics relevant to excess profits:
  - IMF, 2019b, “Corporate Taxation in the Global Economy,” IMF Policy Paper, March 2019.
  - OECD, 2021a, “Statement on a Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy.” OECD, Paris.
  - OECD, 2021b, “Important Disclaimer Regarding the Limitations of the Country-by-Country Report Statistics.” OECD, Paris.
  - OECD, 2020, “Dividends and Other Mismatches in the Dutch CbCRs.” OECD, Paris.
  - Tørsløv, Thomas, Ludvig Wier, and Gabriel Zucman, forthcoming, “The Missing Profits of Nation,” Review of Economic Studies.
  - UN, 2022, “Global Impact of War in Ukraine: Energy Crisis - Global Crisis Response Group,” Brief No. 3.

- Sector- and instrument-specific taxation research:
  - Matheson, Thornton, and Patrick Petit, 2021, “Taxing Telecommunications in Developing Countries,” International Tax Public Finance 28: 248–280.
  - Wen, Jean-Francois, 2018, “Progressive Taxation of Extractive Resources as Second-Best Optimal Policy.” IMF Working Paper No. 2018/130.
  - Keen, Michael and John King, 2022, “The Croatian Profit Tax: An ACE in Practice,” Fiscal Studies, 23(3): 401–418.
  - Saez, Emmanuel, and Gabriel Zucman, 2020, “Jobs Aren’t Being Destroyed This Fast Elsewhere. Why Is That?,” New York Times.

### Implicit policy-relevant takeaways reflected by the citations
- Historical evidence on excess-profits taxation provides varied lessons on wartime and crisis-era revenue instruments and their administrative and economic effects.
- Modern debates integrate corporate tax incidence, real effects on production and investment, and distributional considerations.
- COVID-19 recovery and crisis responses have prompted renewed analysis of temporary or targeted levies, including legal design and cost estimates.
- Cross-border profit shifting, digitalization, and country-by-country reporting limitations are central to assessing the feasibility and potential leakage of excess-profits style taxes in a globalized economy.
- Sector-specific design (e.g., extractive industries, telecommunications) and country experiences (e.g., Croatia) inform practical design choices such as base definitions, exemptions, and administrative mechanisms.

*Excess Profit Taxes: Historical Perspective and Contemporary Relevance, Working Paper No. WP/2022/187*

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_Source: https://www.imf.org/-/media/files/publications/wp/2022/english/wpiea2022187-print-pdf.pdf_