What European Countries Are Doing about Windfall Profit Taxes

As energy prices continue to rise, more European countries have been looking at windfall profit taxes—a one-time tax levied on a company or industry when economic conditions result in large, unexpected profits—to fund relief measures for consumers. As early as March 8, the European Commission recommended in its REPowerEU communication that member states temporarily impose windfall taxes on all energy providers. The Commission suggested such measures be technologically neutral, not retroactive, and designed in a way that doesn’t affect wholesale electricity prices and long-term price trends.

According to statistics from the International Energy Agency, the Commission estimated these measures could yield up to €200 billion in 2022. The revenue could then be used to partially offset households’ high energy bills “in a non-selective and transparent measure supporting all final consumers.”

Countries like Romania and Spain already implemented a temporary mechanism in 2021 to cut excess revenues of energy companies that benefit from higher energy and gas wholesale prices.

Six months after the Commission’s recommendation and continued energy price increases, 15 European countries have either announced, proposed, or implemented windfall profit taxes.

Greece, Hungary, Italy, Romania, Spain, and the United Kingdom have implemented a windfall tax. The Czech Republic and Poland have published proposals to enact a windfall tax and Spain published a proposal to enact a second windfall tax because the first one was diluted by a series of exclusions that left many energy providers out of its scope. Belgium, Finland, Germany, Ireland, Netherlands, and Slovakia have either officially announced or shown intentions to implement a windfall tax. France is, for now, the only country that voted down a windfall tax proposal.

The proposed and implemented windfall taxes differ significantly in their tax rates (e.g., Greece’s is up to 90 percent) and their structures. Additionally, many of the proposed and enacted measures are not proper windfall profit taxes—they go beyond merely taxing windfall profits.

In most countries with windfall taxes, the tax base is not designed in a way that exclusively captures the windfall profits generated by the spikes in energy and oil prices. In Romania and Spain, for instance, a tax on electricity sold over an arbitrarily determined price or on total sales is not a tax on profits at all—it resembles more of an excise tax. On the other hand, Italy’s windfall profit tax (the Incremental Added-Value) could be influenced by a variety of factors, including mergers and acquisitions, which are not linked to price changes.

In other countries, the tax base is calculated as the difference between the current profits and the profits generated over a baseline period. Nevertheless, these incremental profits are not necessarily excess or supernormal returns and a windfall tax could translate into double taxation of regular profits.

The flawed design of these windfall profit taxes has already created problems in countries that implemented them. While the constitutionality of Italy’s windfall tax is questioned, the country hardly collected €2 billion out of the €11 billion expected revenue. In Poland, as companies are already struggling with higher energy costs, business associations warned that this measure would “lead to an uncontrolled wave of bankruptcies that will hit the Polish economy.” In Spain, after the announcement of a possible EU-wide windfall tax, the country’s government vowed to adjust the two new windfall tax proposals, already heavily criticized by the targeted sectors, to the EU design.

It’s unlikely these implemented and proposed windfall taxes will achieve their goals of addressing high gas and energy prices and raising additional revenues. They would more likely raise prices, penalize domestic production, and punitively target certain industries without a sound tax base. Although an EU-wide windfall tax is not a good option, it does not have as many problems as the current proposed and implemented windfall profit taxes.