After the UK, Spain is Taxing Companies Making Extraordinary Profits. Who’s Next?

Carolane De Palmas
Updated: Jul 14, 2022, 13:31 GMT+00:00

This tax, commonly known as “windfall tax” or “excess profits tax” tends to be temporary but can also become permanent, depending on the government’s specific policies.

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With many of the major economies around the globe struggling to keep inflation under control and the price of living skyrocketing, it was really only a matter of time before extraordinary measures were needed to ease the pain…

A little background

Back in WWI and WWII, the British, US, and Canadian governments – among others – imposed a tax on corporations that were making extraordinary profits on the back of those crisis conditions, in order to support the population and help with the ongoing recovery of their economies.

This tax, commonly known as “windfall tax” or “excess profits tax” tends to be temporary but can also become permanent, depending on the government’s specific policies. It’s generally levied on business income that is above a normal rate of profit. The ‘extra’ income is taxed at a separate rate in addition to the individual or corporate income tax that is already paid.

Understandably this is not a popular policy among many of those involved in the high-earning corporate world as it reduces some of the motivation derived from making a profit, but there are extreme circumstances where it makes sense and seems only fair to employ them.

Who’s using the measure right now?

Now in the wake of the pandemic, the conflict in Ukraine, supply chain issues, and China’s lockdowns, among other things, there are many companies that seem to have clearly taken advantage of increased prices, government support programs for businesses, and new booming demand as a result of government policies.

In the case of Spain’s recent decision to introduce such a tax, their Prime Minister, Pedro Sanchez of the Socialist Party, told parliament in a state of the nation speech on Tuesday 12th July that the new measures should generate around 7 billion euros in 2023 and 2024.

In justifying the decision, which came as a total surprise to some in the banking industry, Sanchez commented that inflation was the biggest challenge for Spain, comparing it to “a serious illness of our economy that impoverishes everyone, especially the most vulnerable groups.”

Shortly after the announcement, Sabadell (SABE) closed with a drop of 7.4%, Bankinter (BKT) fell 5%, and Caixabank (CABK) also recorded a fall of 8.6%. Most of them are falling today, as the IBEX35 gets deeper in the red today, as you can see on the above charts from the ActivTrader platform.

Spanish stocks

In opposition to the announcements relative to financial lenders, Reuters reports that the Spanish banking association’s spokesperson, Jose Luis Martinez, commented that the “European Central Bank’s possible rise in interest rates did not necessarily ensure an improvement in bank’s profitability, nor did it translate into extraordinary profits, but rather responded to the rise in inflation and may lead to less economic activity.” Possibly pointing to the idea that the banks were perhaps not the most worthy targets for increased taxation.

Specific companies targeted in Spain, although the finer details are still unknown, will be those with turnovers of over 1 billion euros. This would include energy firms that are benefiting from rising prices and financial institutions since interest rates were on the way up.

Prime Minister Sanchez further commented that the profits from rising prices “must be returned to citizens” rather than “fattening” the “salaries of big business leaders,” he said.

The Spanish government isn’t the first to resort to a temporary excess profits tax policy this year. Back in May, despite Boris Johnson’s objections that it would be a bad move for investment, the UK imposed a 25% energy windfall tax on oil and gas producers for the same purpose of helping the population deal with surging household bills. This was hoped to be phased out when the price of commodities returned to normal levels, whenever that may be.

Similarly in Italy, the government declared that its energy companies would have to pay a once-off 25% levy due in November to combat rising prices. As did Hungary with a comparable policy around the same time, with their Economic Development Minister, Marton Nagy, saying in a statement that the new set of windfall taxes imposed on banks and a range of other companies like insurers, energy firms, and airlines (among others) would be temporary and targeted measures.

India also imposed a tax of 23,250 rupees per tonne on their domestic production of crude. The government commented that the new levy was introduced “by way of special additional excise duty” and tracks the rapid increase in international crude prices.

Who might be next?

While it hasn’t been legislated yet, there have been recent talks of introducing a tax on the excess profits of oil and gas companies in the US. Senate Finance Committee Chair, Ron Wyden, called for the 21% tax to be implemented for companies with over $1 billion in yearly revenue in a statement on the 14th of June.

Senate Budget Committee Chairman, Bernie Sanders also promoted the idea of a 95% tax on windfall profits of those companies earning more than $500 million in annual revenue at a hearing back in April. Stating: “We’re seeing record-breaking levels of stock buybacks. We’re seeing high dividends. We are seeing and living through a moment in American history where the people on top are doing phenomenally well while working people are struggling.” Sanders pointed to specific companies such as Exxon Mobil and Tyson Foods as reporting much higher profits during the last couple of years of the pandemic.

Supporters say the current increased revenues for these companies are a direct result of the conflict in Ukraine and the fallout from the pandemic, and not from better business strategies or new investments, but some economists argue that a windfall tax will just have the opposite effect of what lawmakers hope, leading to higher prices again and more reliance on foreign imports while doing nothing to stimulate local production.

Canada’s International Institute for Sustainable Development published an article on the 11th of July, suggesting the windfall tax as a viable alternative to their current measures for reducing stress on households, and those in the country’s provincial green parties have been calling for the idea to be revisited ahead of their next ministers’ meeting due to be held in the coming days.

About the Author

Carolane graduated with a Masters in Corporate Finance & Financial Markets and got the AMF Certification (Financial Markets Regulator in France). Afterward, she became an independent trader, investing mostly in European and American stocks/indices.

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