Windfall Tax in the European Union: Do Desperate Times Call for Desperate Measures?


Exxon Mobil has recently moved the European General Court seeking its intervention for striking down the windfall tax imposed by the European Union (“EU”). For context, the EU recently passed The EU Energy Crisis Contribution Introduction Bill, 2022 which provides for incorporation of a temporary windfall tax in the face of steep upsurge in energy costs and in particular fuel prices. Council Regulation 2022/1854 mandates for emergency measures like cap on market revenues for inframarginals, windfall tax, etc. The windfall tax is pegged at a minimum of 33% on the supernormal profits of fossil fuel firms arising out of exceptional circumstances, for instance, current confrontation between Russia and Ukraine. However, the measure has not been well-received by the energy companies, creating discord between the stakeholders. This piece uncovers drawbacks associated with windfall tax insofar as its economic impact and legal implications in the backdrop of a string of reasons for imposition. Further, the piece reflects on practices of certain EU member states vis-à-vis windfall tax and ends with tangible recommendations.

Rationale for Imposition

A common thread between recent legislations on energy companies, precisely oil manufacturers, is the prevailing Russia-Ukraine conflict.  The resultant spike in prices of oil, gas, and electricity affected the European consumers and triggered energy price inflation. The European Commission (“EC”) justified its windfall tax by arguing that fossil fuel companies unjustly benefited from the war and burgeoning demand in winters, and not from administrative efficiency or additional investment. For instance, the financial statements of Shell indicate that it recorded $20 billion on the balance sheet in just six months, its biggest revenue stream thus far. Similarly, another energy company TotalEnergies which is based out of Paris, clocked $29 billion in profits. The United Nations Secretary-General, Antonio Guterres also called for taxing the excessive profits of fossil fuel companies and diverting the same as aid for affected people.

The need to control budgetary deficits and public spending arises from the Maastricht criteria (“Convergence Criteria”), which binds EU member states to maintain appropriate budgetary deficits for price stability. Maintenance of budgetary deficits is salient considering its imbalance segues into high rates of inflation. Consequently, concerns of budgetary deficits precede private interests and hence, member states as well as the EU resort to the implementation of windfall tax.

Further, the EU hopes to raise a ballpark of €200 billion as proceeds. It has been said that such taxes would help in bringing down the energy prices, relieving the consumers. The EU also underscored the importance of funds for its ‘REPowerEU’ plan, targeting diversification in suppliers and easing the transition in renewable energy. 

In view of the above points, the EC turned to Article 122 of the EU Treaty, an emergency provision enabling the EC to bypass the Parliament in times of crises, especially with regard to energy. Through this measure, the windfall tax legislation arose to tap into supernormal profits stemming from exceptional circumstances qua additional investment. Not to mention, some EU member states like Italy, Spain, Germany and others have already imposed windfall tax on energy companies.

Drawbacks Underlined

Considering the geopolitical instability and economic interdependence in view of Russian Offensive, imposition of windfall tax increases possibilities of serious fallout. To contextualise further, the EU has put price caps on Russian exports and has decided to ban all Russian oil imports. Owing to the lack of incentives, the major oil supplying companies would be deterred from producing for the European Union. Want of cheaper Russian Oil and simultaneous disincentivised oil producers, would put EU in a tight spot. Apart from the general corporate tax, an additional tax runs the risk of discrediting a country’s promises of investment opportunities. At a time when companies themselves are encountering inconsistent international energy prices, such tax carries the risk of bringing down the investor-trust to a new low. It is probable that the later investors of the company will be charged windfall tax instead of former investors, thus inducing skepticism about new investments.

ExxonMobil stated: “European industries already face a very real competitiveness crisis and governments should be supporting the production of reliable and affordable energy.” Considering fundamental economic principles, this tax would prompt the companies to jack up energy prices, and thus shift the burden on consumers. Interestingly, its modus operandi indicates instead of improving the pricing scenario, it risks spiking the fuel inflation rate; affirmed by the Nobel Laureate Paul Krugman and President Biden’s Vice Chair of the Federal Reserve, Lael Brainard. In a similar vein, data suggests that despite windfall tax, the margin on diesel and jet fuel went above the five-year average from 2017-2022.

Further, it is a reality that companies in the energy sector undergo cycles of boom and bust, indicating that companies earn sizeable profits in one cycle, while incurring losses in the other. Therefore, it appears likely that companies sustaining losses in the previous year – catching profits this year – would lose their profits this year because of the tax. This, therefore, results in negative or zero returns, and further hurts companies’ viability. Seemingly, the normal profits of a company could be taxed twice, considering not all incremental profits are windfall profits, as seen above. Studies point to the fact that taxing short-term windfall profits arising out of cyclical businesses segues into misallocation of resources and distortion. The practice of bifurcating normal and supernormal taxes risks expanding administrative expenses, when the coffers have already been strained since the onset of the pandemic.

The looming threat of climate change has also highlighted the urgent need to shift from non-renewable to renewable sources of energy. A renewed effort to shift from non-renewable to renewable energy is on the cards. In this vein, the EU has undertaken the same as well, illustratively, REpowerEU. Nonetheless, a rapid transition is not viable due to decades-long dependency on fossil fuels. The implementation of windfall tax jeopardises capital outlay of the companies, requiring companies to rework their capital expenditure to meet the tax demand; resultantly, shrinking investment outlay in renewable energy and finally, energy production. The IEA reports that oil majors like Shell, BP and others accounted for 90% of total clean energy investment, thus, taxing reduces investment prospects.

Already dented domestic production lacks chances of getting supplemented by renewable sources of energy. Not to mention, windfall taxes injure domestic production as evidenced in President Carters administration (domestic oil production reduced by 8% due to enactment of the Crude Oil Windfall Profit Tax Act, 1980). Worryingly, it increases reliance on foreign sources. Hence, it fails to realise the ultimate aim of doing away with Russian imports in near future.

Moreover, the EU belies its principle of “Tax Fairness” as it disproportionately targets the energy sector. Illustratively, the pharma industry slid out of the EU’ purview. Oxfam has called the EU to adopt windfall tax not only against energy companies, but also pharmaceutical companies like Pfizer and more. The desired outcome of levying windfall taxes is whisking off windfall gains. Hence, corporate profiteering must be the goal rather than sector-specific imposition; if the administration chooses to green-light windfall tax. Notwithstanding current debate, windfall tax finds appearance in the policies of a few member states of EU, as highlighted below.

Situation In EU Member Countries: A Few Examples


The Spanish government had to roll back its proposed windfall tax on power utilities, since the companies warned the customers of an uptick in energy prices. Despite that, it imposed windfall taxes again on energy companies and banks till June 30, 2022 (later extended with modifications). However, it did not have a tangible or real effect in resolving increasing wholesale prices, as revenue collection fell short of the target set by the government. Not to mention, the Spanish government has formally asked the EU to extend the price cap on gas. In a recent development, Repsol, an energy company in Spain, and the Spanish Banking Association have appealed the Ministerial Order on windfall tax challenging its legal validity under the purview of the Spanish and European Union Laws


On 29 December, 2022, through the Budget Law for 2023, Italy levied 50% windfall tax on the extra income of oil companies in accordance with the windfall tax set-up of the EU. However, this is not the first-time windfall tax was imposed. Article 37 of the Law Decree no. 21/2022 had imposed 25% windfall tax on supernormal profits from October 2021 to March 2022. With regards to collections under the latter, Italy gathered €2 billion out of its estimated €11 billion in revenue. Though the Italian Constitution permits different tax treatment for specific sectors, the Robinhood Tax case pinpoints certain criteria for the legislation to meet. In light of the same, companies have started rushing to Italian Courts for redressal.

Germany and Poland

It is reported that the German government plans to roll out “EU energy crisis contribution” aiming to scrape 33% of windfall profits made by oil companies. Against this backdrop, note that 10 percent of the German companies are put at risk of insolvency owing to the acute energy crisis (price hikes and increasing demand) and concomitant imposition of windfall tax. Against it, Business associations have signalled their concerns over potential steep rise in insolvencies in Poland.   

Possible alternatives

The sole imposition of windfall tax endangers corporate survivability and national budgets, as outlined above. An “investment allowance” provision could be implemented concurrently, wherein, producers can discount operational and capital expenditure up to a fixed percentage, from excess profits for investment purposes; allaying tax burden from producers and increasing investment in required areas.    

Additionally, instead of windfall tax, countries could target a rise in stock market capitalization following circumstantial benefits. Also, while determining windfall tax, rates could be identified with respect to each stage of the energy-value chain, as generally mid and downstream companies stir up greater windfall profits.

More so, it is advised that the European Union employs EU Toolbox measures, to address impact from immediate increase in prices. Such apparatuses were first identified in the Commissions communication ‘Tackling rising energy prices: a toolbox for action and support’. It consists of various tools and measures for short and medium-term economic impact, that EU countries can undertake under the legislative framework, in addition to pre-existing remedies. For instance and discounted bills, reduced levies. Lastly, the tax policy could be efficient in implementation by involving all the stakeholders and precluding possibilities of litigation. And non-discriminatory in nature, since the current policy is directed only towards the energy sector in place of all the sectors enjoying supernormal profits.


It is unequivocally argued here that rising energy prices must be dealt swiftly, although, not through imposition of windfall tax alone. The mechanism of windfall tax is loaded with nods to fixing unjust corporate profiteering, however per contra, its fallacies puts it in a bad light. Drawing learnings from the fallout due to the Crude Oil Windfall Profit Tax Act, 1980 and various other instances narrated above, it is inferable that lawsuits may become disquietingly frequent and familiar. Hence, the EU and its member states must tread carefully and adopt a mix of nuanced policies to tie all the loose ends highlighted in this piece.

Shubhankar Sharan is a second year law student at Gujarat National Law University.

Image: Reuters

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