Wall Street Breakfast: Windfall Tax

May 27, 2022 8:33 AM ETBP, TTE, TWTR, USDT-USD, ETH-USD, TRX-USD, MATIC-USD, GME, AVGO, VMW, NVDA, COST, ACB, CVX, GPS, QQQ, SPY, ACB:CA109 Comments
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Windfall tax

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The UK introduced a 25% windfall oil and gas tax on Thursday. Prime Minister Boris Johnson’s Conservative government became the first to put into action an argument that the energy industry has profited too much from a surge in commodity prices that are stoking inflation. About 5 billion pounds is expected to be raised, which will finance a one-time payment of 650 pounds to about 8M of the poorest households.

Statements: “The oil and gas sector is making extraordinary profits,” Chancellor of the Exchequer Rishi Sunak said in Parliament. “Not as the result of recent changes to risk taking or innovation or efficiency, but as the result of surging global commodity prices.”

The tax “sends the wrong signal to the whole sector, against a backdrop of rising business taxation elsewhere,” Rain Newton-Smith, chief economist at the Confederation of British Industry, told the BBC.

How it works: Details of the final legislation remain vague. There will be a sunset clause; however, the clause will be price dependent, with no specified date. There will be an investment tax incentive; however, the incentive appears lower than existing incentives. And there may or may not be a "baseline" profitability measure which determines the quantum of the “windfall" profits. Furthermore, investors are left guessing at exactly who will pay the tax.

The UK has a somewhat complicated tax and royalty regime for North Sea producers. All UK resident companies pay corporate income tax on worldwide pre-tax profits. If BP (BP) earns a profit refining oil in Whiting Indiana, it will pay tax on those profits to the UK Treasury. However, the UK also charges North Sea producers a "ring fence" corporate tax, a "supplementary charge", a "petroleum revenue tax" and a "value added tax." Deloitte estimates the effective "government take" on pre-tax profits for UK North Sea producers at between 62% and 81%.

And although the Chancellor did not specify who will pay the incremental 25% tax, it's likely to be imposed on UK producers, rather than UK-domiciled entities alone. That is to say, BP (BP) is unlikely to be charged a windfall tax on profits earned in Indiana, but Total (TTE) will bear the higher rates on UK North Sea production.

Start of a trend? Could the UK’s decision spur movements in other countries for similar taxes? The Wall Street Journal described the decision as “Boris Johnson Goes Bernie Sanders.” Undoubtedly, proponents of windfall taxes will point to a right-wing government embracing such policies as a starting point.

President Joe Biden has called for eliminating tax breaks for oil and fossil fuel companies, but a windfall tax seems remote. While it is a literal Conservative Party, the UK Parliamentary majority has a track record of tax moves that U.S. Republicans would consider as extremely left-wing. In 2011 Tory Chancellor George Osborne put a “supplementary charge” on oil and gas production to the tune of 2 billion pounds.

Energy tax increases “would disincentivize additional production, decrease supply, and subsequently increase energy costs for families at a time of historic inflation and record-high gasoline prices," Anne Bradbury, CEO of the American Exploration and Production Council, told the Houston Chronicle. "For these reasons, members of both parties have consistently rejected attempts to target energy producers with new taxes and fees.” (90 comments)

Elon sued

A Twitter (TWTR) investor has sued the company and billionaire Elon Musk, accusing the company's would-be acquirer of manipulating the market in order to reduce the transaction's $44B price tag.

William Heresniak is charging Musk with deliberately making market-moving statements in order to drive the stock price lower - notably Musk's pronouncement a few weeks ago that the deal was "on hold" until he saw more data about the nature of fake/spam accounts on the platform. (91 comments)

Peso tether

Tether (USDT-USD) launched a new stablecoin pegged to the Mexican peso, marking the stablecoin issuer's entry into Latin America. MXN₮ tokens will be supported initially in the Ethereum (ETH-USD), TRON (TRX-USD) and Ploygon (MATIC-USD) blockchains, Tether said. Tether's expansion into Mexico prompts a "unique opportunity" thanks to the multibillion-dollar flow of remittances into the country, as well as the difficulties involved with internal money transfers, the release said.

Some "40% of Mexican companies are looking to adopt blockchain and cryptocurrencies in some form making Mexico a prime location for the next Latin American crypto hub," Tether said, citing data from crypto payments firm TripleA . (2 comments)

Lower offer

Almost one in five (19.1%) of home sellers have lowered their price during the four-week period ended May 22, the highest rate since October 2019, suggesting homebuyers are starting to reject historically high prices, according to a report from real estate brokerage Redfin.

The median home sale price jumped 16% Y/Y to a record $400K, as the supply-side of the housing market remains tight, Redfin noted, citing data from more than 400 U.S. metro cities.

Furthermore, pending home sales fell 5.4% Y/Y. And new listings of homes for sale were also down 0.9% from a year ago. Active listings (the number of homes listed for sale at any point during the period) fell 13% Y/Y - the smallest decline since April 2020, Redfin said. (86 comments)

Today's Market

In Asia, Japan +0.66%. Hong Kong +2.89%. China +0.23%. India +0.81%.
In Europe, at midday, London -0.10%. Paris +0.69%. Frankfurt +0.50%.
Futures at 6:20, Dow +0.01%. S&P +0.15%. Nasdaq +0.26%. Crude +0.67% to $114.88. Gold +0.51% to $1856.92. Bitcoin +0.04% to $28987.1.
Ten-year Treasury Yield unchanged at 2.75%

Today's Economic Calendar

8:30 International Trade in Goods (Advance)
8:30 Personal Income and Outlays
8:30 Retail Inventories (Advance)
8:30 Wholesale Inventories (Advance)
10:00 Consumer Sentiment
1:00 PM Baker-Hughes Rig Count

Companies reporting earnings today »

What else is happening...

GameStop (GME) rallies again, meme traders vindicated after SEC slaps fine on broker-dealer.

Broadcom (AVGO) confirms deal to purchase VMware (VMW) for $61B in cash, stock.

Cathie Wood jumps back into Nvidia (NVDA), scooping up nearly 250K shares.

Costco (COST) keeps churning out double-digit sales growth.

Aurora Cannabis (ACB) down following $125M bought deal financing.

Nitrogen prices plummet 30%, sending fertilizer makers lower.

Chevron (CVX) shares hit all-time high; unveils streamlined corporate structure.

Gap (GPS) shares crash on big earnings miss, slashed sales guidance.

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