Windfall profits taxes – where are we now?

As the cost of living crisis deepens and more multinationals in the energy sector report record profits, the UN has now joined calls for governments to tax the “excessive profits” of the largest energy companies and to “use the funds to support the most vulnerable people through these difficult times”. But what is the latest response of governments to this situation?

Since our previous blog on this issue here, the UK’s energy profits levy has been enacted, focusing on the oil and gas ring-fence regime. The outgoing government indicated there would be no extension of this regime to electricity generators falling outside this regime, and the newly appointed Prime Minister Liz Truss has also ruled out such an extension, instead announcing a price cap that would freeze energy bills, although how this would be funded remains unclear.

In the EU, the European Commission is considering introducing a cap on the price of inframarginal technologies producing electricity, with a levy applying to profits in excess of the cap. The levy would impact those technologies where large profits have been made, namely renewables, hydropower and nuclear and initial indications are that revenues would be capped at 200 euros per MWh of electricity.  The Commission would like to see revenues generated from this go towards the most vulnerable citizens and businesses. We expect to see concrete plans published by the Commission next week.

In Spain, the regime introduced in September 2021 that required energy providers to pay back a proportion of their increase in income that resulted from the incorporation of the natural gas price into electricity prices has been extended to 31 December 2022. In addition, the Spanish Government, in July, submitted a draft law proposal developing an additional temporary tax on companies from the energy sector based on net turnover.

In Germany, there is little realistic chance of introducing a sector-specific tax. Instead, the German government wants to skim off inframarginal profits of energy producers and would prefer a Europe-wide approach. These profits would be transferred to an account administered by private sector participants (namely the distribution network operators) and distributed to customers and SMEs, as well being used to subsidise electricity grid charges.

In Italy meanwhile, the tax revenues for the first instalment of the windfall profit tax were significantly lower than expected and, as predicted, the tax has been subject to constitutional challenges. Further changes may be introduced to the Italian regime in the coming days.

The Belgian government has just announced that they intend to levy a windfall profit contribution on all energy sector players based on the mechanism of the “nuclear tax” that was introduced several years ago to tax the excess profits from nuclear power plants. The details of this windfall profit contribution will be prepared by a working group by the end of September.

Meanwhile in Austria, the debate about introducing a windfall tax rages on, with an initial proposal put forward by left-leaning organisations. This mirrors the Italian tax as far as scope is concerned, but suggests taxation of windfall profits that are assessed by comparing current year EBITDA with reference EBITDA. Depending on the amounts above the reference EBITDA, a tax rate of 60 per cent or 90 per cent could apply. The proposal suggests that this would apply until at least 2024.

Although Senators in the US proposed legislation in August that would impose an additional 21 per cent tax on excess profits of large oil and gas companies, there seems little prospect of these rules gaining traction in Congress.

For more detail on the latest proposals, please see our in-depth briefing here. This is an area which is developing quickly. If you have any questions about any of the issues raised in this blog or in our more detailed briefing, please get in touch with your usual Freshfields contact.