Silvan Mifsud is director of Advisory at EMCS Tax & Advisory. Mr Mifsud is also a council member of The Malta Chamber
European governments seem to be liking a new trend. Implementing windfall taxes to balance their books and at the same time gain favour with the electorate, who are unsympathetic with companies making high profits while the rest feel the pinch from the rising cost of living. One must remember the huge increase in expenses various EU governments had to go through, during the pandemic, to keep their economies afloat as much as possible.
The latest in this trend is the Italian government’s surprise levy on banks made public on 8 August. The way it was handled was a recipe for disaster and by the next day the Italian government was already backtracking. All this originally started in the wake of Russia’s invasion of Ukraine, which delivered bumper revenues to energy companies, thus leading to windfall taxes being levied on the energy industry. However, we are now seeing such a trend spreading to other sectors as politicians, hit by the rise in interest rates and higher government spending, seek to plug budget deficits. Data indicates that more than 30 windfall taxes, several of which now cover multiple sectors, have been introduced or proposed across Europe since the start of 2022, with a total of 24 EU countries having announced, proposed or implemented a windfall tax on energy companies.
It seems banks will now increasingly become a target, with the Czech Republic, Lithuania, Spain and now Italy imposing charges on the sector and Latvia likely to follow. In other countries the sectors covered by windfall taxes have become even more widespread. Hungary has imposed levies on all financial institutions, including insurance companies, as well as pharmaceutical groups. Portugal introduced a 33% levy on food distributors with excess profits generated in 2022 and 2023.
As we know, nothing is simple. While windfall taxes may seem akin to a magic bullet as the electorate may deem them to be fair, an overuse of them may deter investment. No investor would like to operate in a mine field, whereby they could wake up one morning and be faced with a windfall tax, many times due to external developments beyond their control.
Alternatively, one has to see the effect of the imposition of such windfall taxes on controlling inflation. If interest rates are being increased to dampen demand, while governments are increasing tax revenues by the imposition of these windfall taxes, to then assist better citizens effected by the increase in interest rates, wouldn’t that be a case of fiscal policy working against monetary policy and hence prolonging the agony of high inflation?
All this got me thinking. So which economic sectors in Malta have produced the highest profits between Q1 2019 to Q1 2023? Extracting this from the GDP statistics outlines that the top three sectors were Information & Communication, Manufacturing and Gaming. Digging further shows that the majority of profits in these three sectors (some 60-70% of the increased profits), remain in the business with their respective shareholders, rather than shared with employees through higher wages.
Now I want to make it perfectly clear that I am not in any way advocating that we should have any windfall tax applied on operators in any of these three sectors. None whatsoever. However, it is interesting to see which sectors seem to have been more profitable in the period Q1 2019 to Q1 2023, when compared to the remaining sectors.
One last point. As I started, this trend of windfall taxes is being undertaken as various EU governments are scrambling to balance their books. This will very likely bring renewed pressure on tax harmonisation and hence having various EU governments reduce tax leakages to other low tax paying jurisdictions. This is a matter which sooner rather than later we will have to face as a financial jurisdiction.