Explainer: Will Germany introduce a windfall tax for energy companies?

BERLIN, Sept 3 (Reuters) – With rising energy prices and a new gas levy in Germany expected to triple fuel bills for consumers from autumn, pressure is mounting for the government to introduce a windfall tax on energy companies to fund further relief measures.

Italy and the UK have introduced similar taxes, while Spain has introduced a temporary one.

But taxing “excessive” profits from energy companies has been a thorny issue for the German governing coalition, with political opposition from a junior party and constitutional obstacles.

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Why a windfall tax in Germany?

Germany’s coffers have already been emptied this year with two aid packages to mitigate the impact of rising energy prices on citizens, as well as funds to upgrade the military and combat climate change.

Finance Minister Christian Lindner, the business-friendly FDP chairman, said that further significant aid for the population – in the double-digit billion range – would have to wait until next year.

But supporters of the windfall tax say more money for hard-pressed citizens could come from a levy on companies making profits deemed “excessive” during the energy crisis.

“Where else is the money going to come from? From tax increases for the general public or from additional debt? Hardly likely,” Andreas Bovenschulte, mayor of Bremen, one of the poorest federal states, told Reuters.

Can a lucky break tax pass Parliament?

There is a dispute within the governing coalition. The Social Democrats (SPD) and the Greens are in principle in favour. But the FDP is against it.

A government spokesman said in June that the government’s coalition agreement signed last year does not provide for taxation of additional profits.

Lindner said that such a step would face legal, economic and budgetary obstacles.

“You have to be very careful with this tool… It’s not a panacea,” Lindner said, adding that the measure would interfere with market forces and undermine confidence in the fairness of the German tax system.

A motion by the states of Bremen, Berlin, Mecklenburg-Western Pomerania and Thuringia to introduce such a tax did not find a majority in the Bundesrat at the beginning of July.

What do the Germans think of a windfall tax?

Around 76 percent of Germans support it, according to a survey by the opinion research institute Infratest dimap in August. The greatest support comes from SPD and Green supporters with 88% and 84% respectively. But even among the FDP voters, 58 percent were in favour.

A Civey poll for the German Stern magazine in June showed that 72% of Germans were in favour.

Which companies would be affected?

The tax would hit energy companies that have benefited from rising oil and gas prices.

But not all German energy companies have reaped unexpected gains this year, as companies particularly dependent on Russian gas imports, such as Uniper (UN01.DE), have been pushed to source the fuel at significantly higher market prices without a chance to do so increase customers.

“RWE, Wintershall, BP, Shell, E.ON: These are the big ones and the classics that immediately come to mind and that’s what it’s all about,” economist and Bundestag finance politician Maurice Hoefgen told Reuters.

Folker Trepte, head of energy at PwC Germany, said an unexpected win could affect conventional electricity companies that generate electricity using coal or other conventional energy sources, where prices are not fixed by long-term contracts.

In July, both RWE (RWEG.DE) and Wintershall raised their outlook for 2022 after reporting strong results. RWE’s adjusted half-year profit rose 80% year over year, while Wintershall reported a 262% increase in adjusted net profit in the second quarter. Continue reading

Would a lucky break tax ease financial bottlenecks?

Italy’s windfall tax is expected to bring in between €10 billion and €11 billion ($9.95 billion to $10.95 billion) in revenue, while former UK Treasury Secretary Rishi Sunak said a similar tax would come into force in the next 12 months billion pounds ($5.76 billion).

A study by Berlin’s Tax Justice Network, published in August, said the tax could bring Germany between €11 billion and €40 billion in revenue over a year.

Andreas Peichl, head of the Ifo Center for Macroeconomics and Surveys, said that while such a tax would bring the government money in the short term, it makes no strategic sense as it would hit future investments.

“It’s a populist option that seems politically opportune in the short term,” Peichl told Reuters, adding that corporate taxes in Germany are already very high by international standards and he doesn’t expect the tax to be implemented.

What are the legal challenges?

The Basic Law only permits new taxes within very narrow limits and excess profits must be integrated into income and corporation tax, said Till Meickmann, a tax law expert at the University of Passau.

“Unjustified unequal treatment (of companies) would be a violation of the general principle of equal treatment and therefore unconstitutional,” Meickmann told Reuters.

However, according to the study by the Tax Justice Network, two reports by the Bundestag’s scientific service argue that a windfall tax is legally possible in Germany.

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Reporting by Riham Alcousaa; Edited by Andrew Cawthorne

Our standards: The Thomson Reuters Trust Principles.

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