Italy amends recent windfall tax

Italy has revised its proposed windfall tax for banks, leading to a recovery in the share prices of the country’s financial institutions. The government initially introduced a surprise one-time tax of 40% on the profits generated by banks from higher interest rates, causing a sharp decline in share values. The intended use of the proceeds was to assist mortgage holders and reduce taxes.

However, the finance ministry announced a modification late on Tuesday, indicating that the tax would now be limited to 0.1% of the banks’ assets. This tax would be applicable to the income derived from the difference between the lending and deposit rates of the banks.

Italian banks such as Intesa Sanpaolo, Banco BPM, and UniCredit, which had experienced a drop in share prices due to the original proposal, witnessed a partial recovery on Wednesday as the initial plan was diluted.

A windfall tax is imposed by governments on companies that have profited significantly from external factors, resulting in unexpectedly large profits. The surge in official interest rates had led to considerable profits for Italian banks, prompting the initial decision by Prime Minister Giorgia Meloni’s ministers.

The sudden move was agreed upon during a cabinet meeting on Monday, where the ministers, including Deputy Prime Minister Matteo Salvini, pledged to allocate the generated funds to aid households and businesses grappling with borrowing costs.

While initial estimates indicated that the levy could generate around €2 billion before the cap, Italian banks expressed concerns about the negative impact of the tax on their profits. The country’s parliament now has a 60-day window to enact the tax decree into law.

Notably, other European nations such as Hungary and Spain have also introduced comparable windfall taxes on banks. Recently, Lithuanian lawmakers supported a temporary windfall tax on banks to fund defence expenditures, and Estonia is planning to raise its bank tax rate from 14% to 18% in the coming year.