Taxes excess profits

During World War II. research driven by 85% tax on excess profits, encouraged investment in research and development of antibiotics tills led to their postwar growth. 

Year Regular tax rate, % Effective limit with wartime excess-profits tax, %... 

During times of national emergency, certain types of business concerns can realize extremely high income and profit. This is true in particular for concerns producing military necessities during wartime. An excess-profits tax may be levied, therefore, to supply the national government with part of these profits. 

The system for determining excess-profits taxes is extremely complex. In general, the amount of the tax is based on the normal past earnings of a concern or on the total capital investment. Special provisions are made for new corporations or for concerns which do not have a normal past history to use as a basis. The excess-profits taxes are very unpopular with businessmen, and there is always considerable opposition to the levying of these taxes. 

Typically, the contractor carries the cost of exploration, appraisal and development, later claiming these costs form a tranche of the produced oil or gas ( cost oil ). If the cost oil allowance is insufficient to cover the annual costs (capex and opex), excess costs are usually deferred to the following year. After the deduction of royalty (if applicable) the remaining volume of production (called profit oil ) is then split between the contractor and the host government. The contractor will usually pay tax on the contractor s share of the profit oil. In diagrammatic form the split of production for a typical PSC is shown in Figure 13.11. 

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