• Cynthia Madison, at Content Creator


• 04.09.2023 05:45 pm
#taxes

Image source: https://unsplash.com/photos/kkACMU0GYko 

Windfall taxes have become some sort of last resort for many European governments in an attempt to cover ever-expanding budget deficits and ease tensions regarding companies that have boosted their profits at a time when rising costs are affecting people’s lives all over the world. 

Until recently, these taxes mostly targeted companies activating in the banking and energy industries, as these two sectors have experienced significant growth lately due to geopolitical events and economic factors. Energy companies were amongst the first to register a spike in revenue after Russia’s invasion of Ukraine, and therefore also the first to be hit with windfall taxes. On the banking front, Italy provides the most recent example with the passing of a one-off 40% windfall tax on August 8, aiming at banks’ profits after a notable surge in interest rates. 

However, the trend appears to move beyond the banking and energy sphere and extend to many other sectors as governments are trying to grapple with the effects of high-interest rates and a lack of money in their treasuries in the context of increased public spending. 

Windfall taxes explained 

For those who are not familiar with windfall taxes and how they work, it might be difficult to make sense of these political decisions. Windfall taxes refer to a specific type of levy imposed by governments on companies that register large and unexpected profits as a result of favourable economic conditions. In other words, these taxes serve as a correction that is meant to level the playing field when certain companies benefit from circumstances they are not responsible for. 

Windfall taxes usually target companies in specific industries that have experienced the highest surge in income due to economic windfall. As such, these taxes can help government address unfair advantages, prevent the exploitation of consumers during times of crisis, and ensure fair wealth distribution, while also allowing them to patch up financial shortages. 

Historically, energy companies have always been the primary targets of windfall taxes. The huge earnings registered by stakeholders involved in the production of oil and natural gas, which more than doubled their profits in 2022, have served as the main drivers for the windfall tax trend. The fact that these companies often continue to charge high prices from consumers despite generating massive gains through no effort of their own, has prompted governments to intervene to redress the balance.  

As expected, the introduction of windfall taxes over the years has attracted conflicting views. Those in support of windfall taxes point out that governments can use the extra levies to fund social programs and thus alleviate the cost-of-living crisis. 

At the opposite end of the spectrum, those who are against windfall taxes argue that no good can come from a tax that discourages companies to boost their profits. According to their view, society would benefit more if companies would reinvest these profits to innovate their operations. Businesses looking to prepare for the future can contact Savanta in Europe, but developing an innovation culture also requires solid investments, so excess profits could be directed toward this goal. 

The windfall tax trend taking over European countries 

Whether windfall taxes are the right solution or not to tackle the issues that European countries are facing at the moment, it’s more than obvious that these levies are spreading quickly all across the old continent, impacting companies in all industries and sectors. Grant Wardell-Johnson, head of global tax policy at KPMG, noted that the wild popularity that windfall taxes are experiencing at the moment is a direct consequence of governments’ fiscal deficit caused by the mismatch between spending and tax revenue. According to KPMG data, there have been no few than 30 windfall taxes proposed or introduced all over Europe since the beginning of 2022. 

As usual, energy companies were the first to be hit by the windfall tax wave, with 24 European countries passing or proposing such levies following the spike in energy prices at the start of 2022. Banks followed shortly after, with countries like the Czech Republic, Lithuania, Spain and Italy setting windfall taxes on financial institutions. 

In other European countries, many of the newly implemented windfall taxes are not limited to energy or banking entities but cover a much wider range of sectors. For example, Bulgaria is expected to adopt a windfall tax that will cover all sectors of the economy, according to a proposal published by the country’s finance ministry. The plan is to incur an additional contribution from all corporate taxpayers and sole traders for the extra revenue registered between July and December 2023. 

In Hungary’s case, windfall taxes already apply to all companies operating in the financial sector, as well as pharmaceutical enterprises, apart from banks and energy providers. These provisions came into effect in December 2022, when the government modified regulations regarding the scope of windfall taxes.  

Portugal has taken a slightly different approach, approving a bill for the introduction of a temporary 33% windfall levy on food distributors. 

Croatia offers another interesting example in this respect by passing the Extra Profit Tax that could apply to all corporate taxpayers for the fiscal year 2022. This means that all companies might have to pay a 33% levy on all additional income generated in 2022. 

The decision to use windfall taxes as a solution to current financial issues has been widely criticized by various financial experts and political commentators. Opponents state that the heavy use of windfall taxes is proof of governments’ inability to maintain financial stability in their respective countries, and could potentially harm investments in the long run. 

Others agree with governments’ decision to introduce and extend the scope of solidarity contributions across all sectors. Their main argument is that windfall taxes represent a fair policy in a time when the majority of people are struggling to make ends meet, while large corporations benefit from record revenues. What’s more, the IMF believes these taxes should become permanent instead of temporary. With countries like Spain, Slovakia, and Hungary already planning to extend these provisions further into 2024 and 2025, this idea might turn into a reality. 

Final thoughts 

While the debate over the fairness of windfall taxes continues all over the world, these levies seem to have become the solution of choice for most European countries amid the background of a struggling economy. For now, it’s too soon to judge the effects of these decisions, so time will tell if such developments are beneficial or not.