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EU businesses lament an increase in windfall taxes

According to tax experts, despite an increase in these levies, long-lasting windfall taxes in Europe are hazardously constructed and poorly target extraordinary gains at energy businesses in a context of rising inflation.

According to Daniel Neidle, the founder of the London-based think firm Tax Policy Associates, windfall taxes should only be applied retroactively to gains within a fixed timeframe.

Windfall taxes, he claims, "are powerful and dangerous tools, but they can be effective in taxing unusual profits as a one-off tax."

He continues, "The design of many European levies is counterproductive because they are taxing profits in the future when the excess may no longer exist."

Portugal, for instance, imposes a windfall tax on certain energy businesses, while Ireland is implementing steps to address excess profits in accordance with EU policy (but Irish ministers said they may introduce extra regulations when the EU levy design is not comprehensive enough).

The Czech government is now debating a number of alternative windfall tax measures that would specifically target banks and energy companies.

According to Grant Wardell-Johnson, global tax policy leader at KPMG in London, the legislative language of windfall taxes in the majority of countries has been vague and general, which undermines trust between the government and taxpayers while both parties attempt to work together on international tax issues.

"Investment behaviours will not change if the tax is retrospective, but only if there is belief that there will not be more one-off taxes in the future, as it breaks the corporate trust," he claims

Regional tax directors are unsure if these regulations are fair because numerous market events can result in excessive gains, and because misaligned windfall taxes in the EU could harm foreign investment and economic progress.

The government is raising the fee to 65% on gas sold above 50 cents per cubic metre under the Mining Act, starting in 2023. Neptune Energy and other Dutch organizations are threatening to move their assets if they cannot offset the tax.

According to a tax expert at Neptune Energy in the Netherlands, plans to increase levies on energy businesses must include an investment allowance to deter organizations from moving equipment and intangible assets to other jurisdictions.

He stated, "It is important that the policies to manage high energy costs do not compromise net zero goals, which could make the Netherlands uncompetitive for global investors."

"By introducing an investment allowance, the government would make the system competitive against other countries that already have allowances in place," he continues.

Only a small portion of the investments in the Norwegian and UK North Seas are in the Dutch North Sea, therefore it would appear that additional funding is required to meet the ambitious energy production targets set by the Dutch Ministry of Economic Affairs.

Another example comes from the new Italian prime minister, Giorgia Meloni, who stated last week in parliament that her government will place a high priority on taxing large multinational corporations.

Nevertheless, Meloni called for the most recent windfall energy tax to be recast because the previous administration suggested it at an unreasonable high 25% rate when corporate profits were lower than anticipated. This is good news for taxpayers.

At a hastily convened emergency meeting on September 30, the European Council established uniform energy taxes to prevent member states from enacting different taxes. Two measures, including a tax on the excess profits made by the fossil fuel industry and a cap on the earnings of power suppliers, were accepted by ministers.

Electricity producers are subject to a revenue cap of €180 ($176) per megawatt hour, and the tax on the earnings of the fossil fuel industry is 33% more than the average amount seen over the previous five years.

The EU emergency legislative package offers a legal foundation for establishing standards on windfall energy taxes. However, there are issues with the definition of a surplus profit in light of the levy's structure and the number of enterprises who are subject to it.

The Council's tax on generators, according to Exxon Mobil CEO Darren Woods, could hinder investments in green energy, a matter that will be discussed at the UN climate conference beginning on November 6.

Before Exxon Mobil's Q3 earnings call, Woods stated: "“As winter approaches, European customers face a very real crisis, and short-term solutions are understandable, but a tax on profits and a price cap will weaken market demand."

Member states must now decide whether to implement the regulation's required solidarity contribution or create appropriate comparable national measures.

The financial services business Citi in London's Jenny Ping, co-head of utilities and new energy research, says ITR that windfall taxes on clean generating earnings are preferable to a revenue price cap on the energy markets.

"A revenue cap on renewable energy will penalise low-carbon investments, but there are sunset clauses that are part of European windfall taxes," she argues, pointing to the law's clear stop on excessive taxing.

Despite the fact that they are often retrospective taxes, recent plans feature expiry clauses. Therefore, even when a group's excess earnings stop, local tax authorities may still target the group's profits.

However, this leads to market instability because businesses could have to restructure if they are subject to higher than usual taxes. Subsidies to cover potential losses are not yet available.

Surplus profits taxes are only permitted in unusual cases, yet they have a significant impact on whether or not businesses trust a nation's tax system. For instance, ill-conceived taxes on generator earnings could seriously damage the renewable energy sector.

However, in a climate of rising inflation, the energy sector is not the only industry generating excess profits. Several countries are also recommending taxes on the banking industry's excess profits.

The UK's Autumn budget, which will be released on November 17, is when the next regional windfall tax on banks is expected to be suggested.

For banks and energy companies, the Czech Republic has a number of competing windfall tax proposals. Spain proposed a two-year levy to begin in 2023, and Hungary has already implemented a tax on its banks. Ten institutions, including two big banks, Santander and BBVA, would be the target of the combined tax effect in Spain.

The European Central Bank (ECB) is scheduled to issue a statement on whether Spain's tax on bank profits complies with EU standards, according to one policy director at the BBVA in Spain. The ECB can contest the breadth of windfall tax measures in the banking industry, the policy director claims.

The recent rate hikes by the ECB and the Bank of England may have had a major impact on bank profitability because higher bank profits are at least partially a result of central bank policies.

The policy director continues, "Not all groups are caught under these European surplus profit measures; it is a difficult task to circumscribe taxation to all large business groups with excess profits under the same scope."

Even while the rate, scope, and timeframe of a fair market levy on excess earnings may have certain drawbacks, windfall taxes do not seem to be going away anytime soon. It would seem that taxpayers should be on the alert.


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