Superprofits Tax: Key Considerations

With consumers choking on energy bills on the one hand, and multiple companies raking in multi-million dollar revenues on the other, Europe is considering evaluating the extraordinary profits of large corporations, particularly in the energy sector.

Why?

Energy giants’ profits exploded thanks to rising oil and gas prices: 18,000 million dollars for the British Shell in the second quarter, 3,800 million for the Italian Eni, 5,700 million for the French TotalEnergies…

At the same time, this price explosion plunges millions of homes into precarity and entails significant spending for states: 236,000 million euros in the European Union between September 2021 and August 2022, not counting Portugal and Hungary, according to the Bruegel Institute.

“It is clear that the big oil companies have done nothing to deserve such high oil prices, it is Putin’s invasion of Ukraine that is at the root of the problem,” said Joseph Stiglitz, a Nobel laureate in economics.

The economist advocates taxing these enormous profits from the think tank ICRICT, which also includes the French Nobel Prize winner Thomas Piketty.

In the face of a potentially explosive debate, the balance is now being tipped by those in favor of introducing this tax.

“In our social market economy, profits are good. But in these times it is wrong to make unexpected gains by profiting from war,” said European Commission President Ursula von der Leyen on Wednesday.

Who?

Brussels is considering limiting the benefits of nuclear and renewable (wind, solar, hydro) power producers.

Currently, they are making “extraordinary” profits by selling their energy at a price well above the cost of production, which unlike power plants and gas does not increase.

The Commission also intends to require producers and traders of gas, coal and oil to “contribute”, set at 33% of profits exceeding the 2019-2021 average by at least 20%.

These proposals, which could mean up to 140,000 million euros (converted to dollars), will be discussed by the member states from now until the end of September. But many countries did not wait.

Spain announced a tax on extraordinary profits of energy and financial companies in the boreal summer, which could bring in around 3,500 million euros in two years. Great Britain and Italy announced measures, as did Hungary, Romania and Greece.

limits?

“These innovative taxes may have loopholes in their design,” London law firm Freshfields Bruckhaus Deringer warned recently in a reference to the measures being taken in each country.

In that report, he pointed to potential challenges both to national constitutional laws and to European state aid rules when these taxes offer a competitive advantage.

French group Engie threatened to challenge Italy’s tax in July, saying it was “poorly designed” and “distorted competition”.

The risk is also political: Brussels does not speak of ‘tax’ but of ‘contribution’ or ‘limitation’, as tax decisions require a unanimous decision of the 27, a more complicated procedure than a qualified majority.

Enough?

For the British NGO Tax Justice Network, the European project is “a step in the right direction, but the ambition could be much bigger”.

“A rate of 33% allows companies in the energy sector to keep two-thirds of that improper revenue,” says their chairman, Alex Cobham.

For Stiglitz, “Europe should go beyond” energy companies.

It could refer to transport, the agri-food sector, finance or technology, as the NGO Oxfam defends.

The tax base issue is also on the table, as many energy giants make little profit at the national or continental level, which could limit the impact of a super-profit tax.

TotalEnergies, for example, claimed to have recorded a tax loss at its French operations last year and acknowledged that it did not pay corporate tax in that country.

“We could base the tax on cash flow instead of profits,” suggested Eva Joly, also a member of ICRICT, warning that “the tricks” of companies need to be taken into account.

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