Excess Profit Taxes: Historical Perspective and Contemporary Relevance

IMF Working Papers, September 16, 2022

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The paper examines the design of excess profits taxes (EPTs) that gained renewed interest following the COVID-19 outbreak and the recent surge in energy prices.
EPTs can be structured to fall only on economic rent, analogous to an allowance for corporate capital, and have parallels with current proposals for reforming multinationals’ taxation.
EPTs can be introduced as:
- permanent measures, or
- temporary add-ons to the corporate income tax to support revenue during an adverse shock episode (reflecting experiences during and after the World Wars).

EPT as an economic-rent tax:
- Can be designed to tax only economic rent (non-distortionary).
- Comparable to an allowance for corporate capital.
Base allocation and design choices:
- A destination-based allocation of the EPT base (for example, using sales) is one design option highlighted.
- Destination-based EPTs can help address cross-border profit-shifting concerns.
Role relative to corporate income tax:
- EPTs can operate on top of the current corporate income tax as an additional layer during shocks or as a permanent reform.

Firm-level data analysis indicates that current geographic locations of excess profit are consistent with profit shifting practices by multinationals.
Quantitative estimate reported:
- A 10 percent EPT on the globally consolidated accounts of multinationals (on top of the current corporate income tax), with the EPT base being allocated using sales, raises global revenue by 16 percent of corporate income tax revenues.

Profit shifting:
- Different from the World Wars era, profit shifting by multinationals is a present-day challenge that can undermine EPTs unless addressed.
Tax competition and enforcement:
- Without coordination, EPTs risk inducing tax competition or further profit shifting.

International coordination:
- The analysis suggests international coordination would be desirable to mitigate the risks of profit shifting and tax competition.
Role of destination-based EPTs:
- Destination-based allocation of the EPT base (e.g., using sales) is put forward as a mechanism to address profit-shifting incentives.
Evolution of corporate taxation:
- EPTs could represent a move toward a non-distortionary rent tax in corporate taxation.

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