European governments are increasingly resorting to windfall taxes as a means to address budgetary shortfalls and address public discontent over corporations reaping substantial profits amid one of the most severe cost of living crises in decades.
A case in point is Italy’s unexpected imposition of a tax on banks on August 8, following a growing trend initiated by the surge in power prices triggered by Russia’s incursion into Ukraine, which resulted in windfall revenues for energy companies.
While the initial focus of these taxes was on the energy sector, they are progressively expanding to encompass other industries. This expansion is driven by politicians grappling with rising interest rates and heightened government expenditures in their quest to fill budget gaps.
Grant Wardell-Johnson, KPMG’s Global Head of Tax Policy, noted, “We’re observing a European wave of windfall taxes, primarily in response to government revenue deficits.”
According to data from KPMG and the Tax Foundation, Europe has witnessed the introduction or proposal of over 30 windfall taxes since the beginning of 2022, many of which now encompass multiple sectors.
Of note, 24 European Union nations have either introduced, proposed, or enacted windfall taxes on energy firms, a move initially suggested by European Commission officials due to surging energy prices in early 2022. The United Kingdom has similarly levied a tax on profits derived from oil and gas extraction in the North Sea.
Financial institutions, including banks, are becoming increasingly targeted, with countries like the Czech Republic, Lithuania, Spain, and most recently Italy implementing levies on this sector. Latvia may also follow suit.
The scope of industries covered by windfall taxes has expanded significantly in some regions. Hungary, for instance, has imposed taxes on all financial institutions, insurance companies, and pharmaceutical groups. Portugal introduced a 33% tax on excess profits generated by food distributors in 2022 and 2023.
In Croatia, a windfall tax now potentially applies to all companies reporting revenues exceeding K300mn (€40mn) in 2022. Bulgaria is even contemplating a broad economy-wide windfall tax.
Critics argue that governments are increasingly resorting to windfall taxes, signalling policy failures and possibly deterring future investments. Industry experts have expressed concerns about the punitive nature of these taxes, which could negatively impact domestic production and certain sectors without establishing a solid tax foundation.
However, proponents of tax justice assert that taxing highly profitable corporations during times of steep essential goods price increases is a justifiable move. As Christian Hallum, tax justice policy lead at Oxfam, notes, “Windfall taxes appeal because they’re intuitively fair.”
Even the IMF supports the notion of permanently incorporating levies on excess profits into the tax system, as opposed to relying on one-off taxes targeted at specific firms or sectors.
The evolving economic landscape, shaped by factors like the pandemic and its economic winners and losers, has prompted governments to increasingly view windfall taxes as a viable revenue-raising option.
Prior to the Ukraine conflict, windfall taxes had not been widely utilised for decades. These taxes were first introduced over a century ago in Europe during World War I. The Gulasch tax, named after the German stew, was introduced in Denmark in 1915 as a tax on Danish food exporters trading with Germany during the war. Over 20 countries, including the UK, US, France, Italy, and Germany, implemented various forms of additional taxes on corporate profits deemed “excessive” during the war. Similar windfall taxes were employed during World War II by the UK, Canada, and the US.
More recent examples include a windfall tax on crude oil imposed by the US government in 1980 and a one-time bank levy introduced by Margaret Thatcher’s British government in 1981. Additionally, the UK’s Labour government introduced a windfall tax on utilities in 1997, arguing that the previous Conservative government had undersold the companies.