Taxing windfall profits: who, how and why?


While consumers lumber under hefty gas and electricity bills, energy companies are racking up billions in profits. This has prompted some European countries to impose windfall taxes to help offset the aid that governments are providing consumers to cope with inflation, and calls elsewhere to do the same.

– Why such a tax? –

Profits of energy companies have rocketed higher on the coattails of soaring energy prices in the wake of Russia’s invasion of Ukraine in February.

Shell earned $18 billion in profits in the second quarter, TotalEnergies 5.7 billion euros and Eni 3.8 billion euros.

Rising energy prices are pushing millions of households into financial precarity, and European governments are on track to spend $169 billion on exceptional measures to help consumers face up to high fuel prices, according to the Organisation for Economic Co-operation and Development (OECD).

The “windfall profits these companies have earned are not because of what they invested, but because they happen to be trading commodities that are scarce because of the war,” said Jacob Kirkegaard, a senior fellow at both the German Marshall Fund in Brussels and the Washington-based Peterson Institute for International Economics.

“Governments are saying that it is not politically acceptable that these companies make this money while everybody else is suffering,” he added.

– Who has done it? –

The latest is Spain, which announced in mid-July a windfall tax on energy and financial firms which could raise 3.5 billion euros over two years.

Previously, London unveiled in May a 25-percent tax rate on big energy companies that should bring in five billion pounds.

Italy has a similar rate in place.

Greece and Romania have also imposed measures on energy firms.

Imposing windfall taxes on energy firms has received support from unexpected quarters, such as the OECD, the European Commission and the International Energy Agency (IEA) to varying extents.

– What are the problems? –

“These types of innovative taxes can be flawed in their design, face constitutional challenges, potentially infringe state aid rules and could be incompatible with existing rules,” said London law firm Freshfields Bruckhaus Deringer in a note.

That is already the case with the Italian tax.

Executives at French energy group Engie say they plan to contest the tax before European authorities because they believe it to be poorly designed and distort competition.

It is also not always easy to determine upon what figure to base the tax. TotalEnergies reported a loss last year for its activities in France and thus didn’t pay any corporate tax.

Alex Cobham, who heads up the British NGO Tax Justice Network, said if energy firms lobby to pay a windfall tax only on the profits they generate in a particular country it will attract more attention to their tax optimisation practices.

– Are there other solutions? –

France, which capped electricity and gas prices at a huge cost to the state-owned EDF, prefers that energy companies undertake their own initiatives.

With the threat of a windfall tax still real, TotalEnergies has announced it will voluntarily cut petrol prices at a cost of around 500 million euros per year.

Such an approach is not supported by all.

“It’s not anything like the scale of what a windfall tax would deliver,” said Tax Justice Network’s Cobham.

“And it doesn’t deliver in the way you would use the resources of a windfall tax to target people on the lowest incomes,” he added. — Agence France-Presse