Europe’s growing businesses are facing a windfall tax increase

Windfall taxation is a popular tool used by European governments to balance their budgets and to quell public outrage over high profits made by companies during the most severe cost-of-living crisis in decades.

The surprise levy by the Italian government on banks on 8 August was just the latest in a long-running trend that began after the Russian invasion of Ukraine, when energy prices surged and brought a slew of profits to the energy companies.

The tax was initially imposed on the industry of energy. The taxes are spreading to more sectors, as politicians try to fill budget deficits, despite the rising interest rates and increased government spending.

Grant Wardell Johnson, KPMG’s global tax policy head, said: “We have this European wave on windfall taxes. It’s a response to the revenue shortfalls of governments.”

KPMG data and the Tax Foundation indicate that over 30 windfall tax proposals, some of which cover multiple sectors now, have been proposed or introduced across Europe since 2022.

Total of 24 EU member states have announced, proposed, or implemented a windfall-tax on energy companies. This was a proposal made by European Commission officials after the energy prices skyrocketed at the beginning of 2022. The UK also levied a tax on the profits from oil and gas extraction in the North Sea.

Banks are increasingly becoming a target. The Czech Republic, Lithuania and Spain have all imposed charges. Now, Italy has done the same. Latvia could follow.

Other countries have expanded the range of sectors that are subject to windfall taxes. Hungary has levied taxes on all financial institutions including insurance companies and pharmaceutical groups. Portugal imposed a 33 percent levy on food distribution companies with excess profits in 2022 or 2023.

Croatia went even further, introducing an additional windfall tax which could apply to all companies reporting a revenue over 300mn for 2022 (€40mn). Bulgaria also plans to introduce a windfall tax that will apply across the entire economy.

* Bulgaria plans to impose a windfall-tax on all sectors.

* The country’s Finance Ministry published in March 2023 a proposal to introduce a “temporary contribution for solidarity” on all businesses. This would be added to the windfall tax that is already imposed on the fossil fuel industry.

* The tax on excess profits would be applicable to all corporate taxpayers, as well as sole traders. It will be imposed at a rate equivalent to 33 percent of the extra profits generated from July to December 2023.

* The extra profits are calculated by multiplying the taxable profits according to corporate tax laws that exceed 50% of the average taxable profits of the four preceding fiscal years by 20%.

* Taxpayers can also opt to calculate extra profits based on 50% of the taxable profit in 2023, instead of the total profits for July to December of 2023.The latest windfall tax in Hungary targeted insurance and pharmaceutical companies as well as banks and energy companies.

* The government of the country published decrees in November 2022 that modify the windfall profit taxes implemented in July 2022 by imposing a temporary surcharge on insurance companies between 1-7 percent.

* The government issued a decree in December 2022 to extend the scope of the windfall profits taxes to the pharmaceuticals sector, which will be applicable to 2022 and 2023. Pharmaceutical companies that generate windfall profits are subject to a tax addition of 1-8 percent depending on their turnover. Companies with revenues over Ft150bn, or around EUR390mn, pay the highest rate.

Industry experts have criticised governments’ increasing use of windfall taxes. One adviser said that these levies are “an admission” of failure in policy and could deter future investment.

Cristina Enache is a global tax economist with the Tax Foundation in the US. She said that such measures would “penalize domestic production” and “punitively target some industries without a solid tax base”.

Although the “solidarity contributions” originally set out by the EU for energy companies were only to last until December 2023 in most cases, some countries, such as Spain, Slovakia and Hungary, plan to continue to collect them through 2024, and even 2025. The UK’s levies are set to expire in March 2028.

Tax justice campaigners, however, say that governments are correct to tax companies who make record profits when they do so at a moment when many people are struggling financially due to the rising cost of necessities such as food and power.

Christian Hallum is the tax justice policy leader at Oxfam. He said that windfall taxes are appealing because they seem intuitively fair. “We are in a situation where many people are suffering and yet corporations are making record profits. It’s just not fair.

The IMF has also advocated for levies to be a permanent part of the tax system.

Shafik Hébous, deputy division head of the IMF fiscal affairs department said: “[This] would be better than relying ex-post on one-off windfall tax on specific firms or sectors.”Portugal’s Parliament has recently imposed a windfall tax on the food industry.

* A bill that introduces a “temporary contribution of solidarity” to the food distribution sector was approved in December 2022.

* The country’s Parliament approved in December 2022 a law that introduced a windfall-tax prompted by EU regulations on high energy costs but widened its scope.

* In fiscal year 2022, the ‘Extraprofit Tax’ will be applied to all corporate tax payers who have a total revenue exceeding 300mn in that year (approximately €40mn).

The tax rate would be 33 percent on the extra profit that is generated in fiscal 2022. Extra profit is calculated according to corporate tax laws as the taxable profits above 20 percent of the average taxed profit for the four preceding fiscal years.

Other industry professionals agree that governments are increasingly looking at windfall taxes to increase revenues due to the change in economic climate.

Wardell-Johnson said that the pandemic, apart from causing governments to need cash, also produced winners and losers. In such an environment, a windfall tax would be much more appealing. If you raised taxes on everyone, the economy would suffer.

Such taxes were not widely used for decades before the war in Ukraine. Levies were introduced in Europe over a hundred years ago during the First World War.

Denmark introduced the Gulasch Tax in 1915 to tax Danish food exporters who continued to trade with Germany throughout the war. At least 22 nations, including the UK and US, France, Italy, Germany and France, imposed an extra tax on corporate profits that were “excessive” during the war. During the second world war, the UK and Canada also imposed windfall taxes.

Margaret Thatcher’s British Government introduced a one-off bank tax in 1981. In 1997, the UK’s Labour Government imposed a windfall on utilities. They argued that the Conservative government had sold the companies at a low price.

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