How Europe’s windfall taxes target energy profits but leave out banking

European tax systems are beginning to adapt to a new reality of extraordinarily high profits in the energy sector, though not to rising revenues in banking. Temporary taxes on oil, gas and electricity companies’ extraordinary profits have been announced in the United Kingdom and by several members of the European Union including Italy, Greece, Spain and Belgium.

These initiatives seek to collect revenues from so-called windfall profits, obtained by energy companies as a result of a global surge in power and gas prices. For now, however, only one European country, Hungary, has introduced a similar levy for financial institutions whose earnings are being boosted by the expectation of an increase in interest rates in the coming months.

Since prices of crude, gas and power began to surge a year ago as a result of increased post-Covid demand - later compounded by the effects of the Russian invasion of Ukraine - several European countries have explored this path. On Tuesday, Belgium’s Energy Minister Tinne Van der Straeten proposed a one-off 25% windfall tax on gas and electricity companies as well as petroleum traders.

Also on Tuesday, Spain’s Prime Minister Pedro Sánchez revealed more details about an upcoming tax on energy companies, saying the state will collect an estimated annual €2 billion from a levy on the profits from fiscal years 2022 and 2023. Affected companies are expected to be those with an annual turnover of over €1 billion, which is to say Iberdrola, Endesa, Naturgy, Repsol and Cepsa. In Spain, oil and gas companies and banks are already subject to a higher corporate tax rate (30%) than other businesses (25%), although deductions tend to reduce the taxable amount.

Among the continent’s biggest players, however, the first country to make a move was Italy, which under the leadership of the liberal Mario Draghi launched a special 10% tax on extraordinary profits in March. A month later it raised the rate to 25%, and a large group of lawmakers now intends to extend the tax to the profits reaped by banks and brokers who trade in energy products.

The Italian initiative, which is retroactive because it affects the profits earned since the end of 2021 – is intended to finance, at least partially, the €14 billion aid package approved by the Draghi government to contain the blow on homes and businesses from soaring electricity bills. Spain has been closely analyzing Italy’s example to develop its own formula.

Different formulas

In early May, the center-right Greek government announced a plan for a 90% levy on the windfall profits of domestic power producers, and said it would use the revenue to improve the precarious situation of many households facing steep rises in their utility bills.

Two weeks later, the United Kingdom announced a 25% tax on the profits of oil and gas companies, though not on electricity companies. According to early estimates, the new tax could raise almost €5.9 billion over the next year and, like Italy, the money would be used to relieve the pressure on households. The tax is expected to be phased out when energy prices return to normal, said Rishi Sunak, then the chancellor of the Exchequer and today a candidate to be the next prime minister following Boris Johnson’s recent resignation announcement.

A specific tax on energy companies was one of the options that the European Commission, the EU’s executive branch, had been considering to tackle the problem of surging energy prices. In a document released in early March with additional suggestions for mitigating the high prices, the Commission stated that “Member States can consider temporary tax measures on windfall profits and exceptionally decide to capture a part of these returns for redistribution to consumers.”

Hungary: A new tax on banking

The banking sector is a completely different case. Although several countries (among them, the United Kingdom, France, Portugal or, more recently, Sweden) have specific taxes for the financial sector, either to return the money delivered in aid in times of crisis, or because of the risks associated with the sector’s systemic condition, only one, Hungary, has introduced a special tax on windfall profits.

In late May, the government of the ultraconservative Viktor Orban announced a special contribution that would have to be made not only by banks and energy companies, but also by insurers and airlines, among others. The total collection target is around €1.95 billion.

Another Eastern European country with a right-wing government, Poland, has been recently discussing imposing a tax on the financial sector’s windfall profits. The warning was issued last week by the former prime minister and current leader of the Law and Justice party, Jaroslaw Kaczynski, who threatened to introduce a tax of this type if financial institutions did not improve their interest rates on deposits.

Beyond the tax measures, the Financial Times announced 10 days ago that the European Central Bank (ECB) is also trying to find a way to prevent the bloc’s banks from profiting from the ultra-cheap financing provided in recent times – especially since the outbreak of the pandemic – once interest rates start to rise. The ECB is expected to tighten its monetary policy next Thursday to deal with rampant inflation and the devaluation of the single currency against the dollar.