The government is considering various measures to help mitigate the energy crisis, and one of these measures is aimed at oil and gas-producing companies that are active in the Netherlands. The government would like to see the industry make a greater contribution to compensating households, now that companies are profiting from high gas prices. The proposed measures have raised several questions, including what the government is proposing, what impact it will have on the industry, and what the impact will be in the longer term.
Profit tax, windfall tax, solidarity contribution, etc. What's the difference?
Essentially, these all amount to the same thing, but different use different names. Work is currently being done on financing the support package for households and small and medium-sized enterprises. The idea behind the proposals is that extreme profits are subject to additional tax; hence the term 'profit tax', but a windfall tax is about more than profits alone. We will come back to this later.
The term windfall tax originated in the United Kingdom, where a similar measure exists. In the European Union, the term 'solidarity contribution' is used when it concerns companies benefiting from high gas prices. The correct name will therefore depend on legislation that has yet to be introduced; it will depend on whether the levy is a surtax, a profit tax, or a combination of the two.
“A windfall tax is about more than profits alone”
What taxes are normally levied in the oil and gas sector?
About 70% of the proceeds from oil and gas production in the Netherlands each year reach the government treasury. The Dutch Mining Act ('Mijnbouwwet') stipulates that oil and gas producers must pay three levies: surface duty, severance tax, and profit share (collectively known as the extractive industries levies). In addition, they also pay corporation tax. Finally, the state also receives a revenue share from the state-owned company Energie Beheer Nederland, which has a 40% equity share in all oil and gas exploration and production projects in the Netherlands.
What are the exact plans for an extra levy for 2023 and 2024?
For 2023 and 2024, the government proposes temporarily increasing the severance tax from a progressive rate of between 0% and 7% to a flat rate of 65% for all gas sales made at a price of more than €0.50 per cubic metre of produced gas. Unlike the current system, this will apply not only to the gas produced onshore but also to the gas volumes produced offshore.
For now, the other levies will remain unchanged, and the Dutch House of Representatives is currently debating the plans.
What's the situation with the EU Regulation on this topic relating to 2022?
The European Union recently adopted a regulation allowing member states, including the Netherlands, to levy an additional profit tax over 2022. This creates a situation in which the tax rules for businesses can radically change within the current tax year, or even retroactively. The Netherlands appears to be the only country where this exceptional measure is set to be implemented retroactively.
The levy amount will depend on the company's average revenues over the preceding five years. These include the coronavirus years, which were lean across the industry and even saw forced redundancies being made. Profits were low in the reference years, meaning that the profits (and therefore the profit tax) in 2022 will be readily flagged as relatively high.
“90 cents of every euro earned might end up in the government's coffers”
The government is adding tax on tax in a sector in which the government already takes a sizeable proportion of the revenues.
Will these levies also have an impact on the security of supply or investments in the energy transition?
Many businesses active in the Netherlands are headquartered in other countries or operate outside the Netherlands. With a system of tax on tax, the Netherlands could find itself out of step with neighbouring countries, with companies facing a choice of whether to invest here or not. Investments are currently being made in hydrogen generation, CO2 storage, and emissions reductions, but financially uncertain circumstances may undermine the willingness to continue investing. This is tantamount to 'throwing out the baby with the bathwater'.
As well as investments in the sustainable energy transition, these companies also invest in the existing gas production and transport network. Demand for gas in the Netherlands in 2021 stood at 40 billion cubic metres, around 12 billion cubic metres of which were met from our small fields. Gas demand will continue to exist for many years to come, and local production is preferable.
Apart from the loss of this economic activity, less gas from the Netherlands will create a dependency on imports, upwards pressure on gas prices, and falling gas revenues. What is more, the CO2 footprint of imported gas is around 30% higher.
“The industry's alternative proposal includes a substantial financial contribution as well as a favourable investment climate for sustainability”
What are the industry's alternative proposals?
The industry supports the government's plan to make a financial contribution to the support package but proposes a more realistic contribution. A contribution linked to higher profits, i.e. a severance tax based on a progressive scale rather than a flat rate. This will ensure that the profits remitted will increase in line with profits. The final amount of the contribution in this case would be at least as high, if not higher.
Furthermore, the industry advocates investment relief for businesses to secure gas production in the Netherlands and hence the transition to more sustainable fuels.
The proposal in this form kills two birds with one stone: it ensures that the badly-needed favourable investment climate for businesses is maintained and, at the same time, results in a substantial yet fair contribution that will help households who need it most.
See here also the interview with Element NL's Chairman, Menno Snel, on NPO Radio 1 about this topic.