Will Germany introduce a windfall tax on energy firms?

As rising energy prices and a new gas levy in Germany are expected to triple fuel bills for consumers from autumn, pressure is mounting on the government to introduce a windfall tax on energy firms to fund further relief measures.

Italy and the United Kingdom have implemented similar taxes, while Spain has introduced a temporary one.

But taxing “excessive” profits of energy companies has been a thorny issue for Germany’s ruling coalition, with political resistance from a junior party and constitutional barriers.

Why a windfall tax in Germany?

Germany’s coffers have already been drained this year with two relief packages to mitigate the impact of rising energy prices on citizens, plus funds to upgrade the military and battle climate change.

As such, Finance Minister Christian Lindner, the pro-business Free Democratic Party (FDP) leader, has said that further significant aid for the population – in the double digits of billions of euros – should have to wait until next year.

But advocates 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 supposed to come from? From tax increases for the general public or from additional debt? Hardly likely,” Andreas Bovenschulte, mayor of Bremen, one of Germany’s poorest states, told Reuters.

Can a windfall tax pass parliament?

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

A tax on excess profits is not, in principle, foreseen in the German government’s coalition agreement signed last year, a government spokesperson said in June.

Lindner said there were legal, economic and budgetary barriers against taking such a step.

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

Germany’s gas situation is tense and could worsen 

A motion by the states of Bremen, Berlin, Mecklenburg-Western Pomerania and Thuringia to introduce such a tax failed to get a majority at the upper house of parliament earlier in July.

What do Germans think of a windfall tax?

Some 76% of Germans support it, a survey by pollster Infratest dimap showed in August. The biggest support comes from SPD and Greens supporters with 88% and 84% respectively. But even among FDP voters, 58% were in favour.

A Civey poll for Germany’s Stern magazine in June showed 72% of Germans were in favour.

Which companies would it affect?

The tax would hit energy groups that have benefited from surging oil and gas prices.

But not all German energy firms have made windfall profits this year as firms that were particularly dependent on Russian gas imports, such as Uniper (UN01.DE), have been pushed to procure the fuel at significantly higher market prices without being able to pass the increase to clients.

“RWE, Wintershall, BP, Shell, E.ON: These are the big ones and the classics that immediately come to mind and it’s about them,” Maurice Hoefgen, an economist and Bundestag financial policy researcher, told Reuters.

Folker Trepte, energy leader at PwC Germany, said a windfall profit could impact conventional electricity firms that generate power with coal or other conventional power sources where the prices were not locked in through long-term contracts.

In July, both RWE (RWEG.DE) and Wintershall raised their 2022 outlook, after reporting strong results. RWE half-year adjusted net income rose 80% year-on-year while Wintershall reported a 262% jump in second quarter adjusted net income. read more

Would a windfall tax ease financial bottlenecks?

The windfall tax in Italy is expected to bring in between 10 and 11 billion euros ($9.95 – $10.95 billion) in revenue while former British finance minister Rishi Sunak said a similar tax would raise 5 billion pounds ($5.76 billion) in the next 12 month.

A study by Berlin-based Tax Justice Network published in August said the tax could bring between 11 to 40 billion euros in revenues over a year for Germany.

Andreas Peichl, head of the Ifo Center for Macroeconomics and Surveys, said although such a tax would bring money to the government in the short term, it did not make sense strategically as it would hit future investments.

“It is a populist option that appears politically opportune in the short term,” Peichl told Reuters, adding that corporate taxes in Germany were already very high in international comparison and that he did not expect the tax to be implemented.

What are the legal challenges?

The German constitution only permits new taxes within very narrow limits and an excess profit would have to 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 equality and therefore unconstitutional,” Meickmann told Reuters.

However, two reports by the scientific service of the Bundestag, the lower house of parliament, argue that a windfall tax is legally possible in Germany, the Tax Justice Network study said.