Does the new TOP101 justify introduction of a windfall tax? Probably no

Villu Zirnask

Business journalist

Windfall tax, i.e. a tax on extraordinary corporate profits (or, to use politically more charged terms - excessive or surplus profits) has been a popular tool for European governments in the past couple of years. In 2022 when energy prices soared, windfall tax was targeted at energy companies, and in 2023 when the Euribor rose rapidly, politicians started to look for ways to collect a bigger slice of banks' profits.

In Estonia, the windfall tax issue has remained largely at the level of talk: no additional tax was imposed on energy companies (as of this autumn, in the EU only Estonia, Denmark, Malta and Cyprus had not introduced windfall tax on energy companies and, in addition, Poland, the Netherlands and Luxembourg had planned it, but had not yet implemented). In the case of banks' profits, the additional taxation issue, large banks and the government agreed that the banks will share more profits next year (as of the autumn, in the EU only Lithuania and Italy had imposed a windfall tax on banks and Latvia is planning it).

But does the new TOP101 Estonia's most valuable enterprises support the idea of additional taxation of energy companies or banks. If the profits are big or very big, perhaps this could be reflected in the value of the respective company? This mainly concerns energy companies, because the financial results for 2022 which form the basis for 2023 TOP101, fully reflected the high prices of electricity and other energy carriers, but not yet the rise of Euribor rates.

The 2023 TOP101 includes six banks, four of which are in the top ten and two in the top three. It was similar in last year's ranking as Swedbank was also No. 1, Luminor was also in the top three and LHV was at its border. At the same time, the value of banks has not changed much in two years The only exception is Coop Pank, whose value has increased by a quarter, but this is more due to their own rapid development than the easy income from the rise in Euribor.

The ranking includes thirteen companies operating in the energy sector specialising in energy trading, energy production or provision of utilities services). Of them, eight have risen higher in the ranking, four have fallen and one has stayed unchanged. The value of seven companies has risen, notably for some, while five saw a drop and one stayed the same. Therefore, it cannot be said about the Estonian energy sector that the increase in energy prices in 2022 significantly increased the value of energy companies.

In short, neither last year's nor this year's TOP101 justify the introduction of a windfall tax, as neither energy nor banking sector companies have notably increased their value. It could be said that the continued dominance of banks at the top of the ranking is a bit sad since the elite Estonian companies should be more diverse in terms of business areas.

Finally, in the spring 2022 also the European Commission recommended to introduce windfall tax for energy companies. However, in a report published in June 2023, the Commission had changed its position and admitted that the benefits of taxes introduced by EU member states do not outweigh the losses caused by increased investor uncertainty and the threat to the smooth functioning of the energy market. The deterrent effect on investors is exacerbated by the fact that tax structures and tax rates vary widely from member state to member state.

In its analysis published in the spring 2023, the European Parliament notes that although in theory, windfall tax should not reduce investment (supposedly because the tax would only be imposed on the part of the profit that exceeds the investor's expected profit margin), but in practice it has been observed throughout history that it does reduce investment.

Let us hope that the Estonian government that is desperately seeking new tax revenues will remain loyal to its policy not to tax additionally any sector that seems to be doing too well at the moment. This would help to make sure that there will be new strong and valuable companies in the coming TOP101 rankings.