ECB Opposition... Italy Significantly Revises Bank 'Windfall Tax'

ECB Coalition Partners Oppose
"40% One-Time Tax Imposition Canceled"

The Italian government has significantly revised the 'windfall tax' bill that imposes an excess profit tax on commercial banks that recorded record profits due to high interest rates. By scrapping the plan to impose a one-time tax of 40% on excess profits, the original purpose of the bill to levy taxes on excess earnings has effectively been nullified.

According to the revised windfall tax bill obtained by major foreign media on the 24th (local time), the Italian government has finalized a plan allowing each bank to allocate the amount earned from high interest rates as reserves to secure additional liquidity, instead of taxing the huge additional profits earned by commercial banks.

Italian Prime Minister Giorgia Meloni. [Image source=Reuters Yonhap News]

Under the revision, banks can be exempted from the tax if they set aside reserves amounting to 2.5 times the tax (excess profits) they owe. Additionally, the cap on the windfall tax amount has been relaxed from 0.1% of the bank's total assets to 0.26% of the bank's risk-weighted assets.

This represents a significant retreat from the original plan to impose a one-time tax at a 40% rate, effectively undermining the legislative intent of the windfall tax as a 'tax collection' measure.

Antonio Tajani, Italy's Deputy Prime Minister and Minister of Foreign Affairs, who opposed the introduction of the bank windfall tax, welcomed the revised bill, saying, "The amended bill will protect depositors and contribute to stabilizing the international financial market."

This move came just ten days after the European Central Bank (ECB) recommended withdrawing the windfall tax bill. Earlier, on the 13th (local time), the ECB held a board meeting in Frankfurt, Germany, expressing concerns that the Italian government's plan to impose a windfall tax on banks could increase the banking sector's vulnerability to the effects of an economic downturn and urged a careful assessment of the tax's impact.

The ECB stated, "The windfall tax may not be proportional to banks' profitability and capital generation capacity in the long term," and warned, "The imposition of the windfall tax could lead to the withdrawal of foreign investment funds from the Italian financial sector, causing side effects such as increased funding costs." Although the ECB's opinion is a non-binding recommendation, Bloomberg pointed out that it has further heightened tensions between the ECB and Italy.

The windfall tax bill has also faced strong opposition within the region. Among coalition partners, Forza Italia, the party led by the late former Italian Prime Minister Silvio Berlusconi, fiercely opposed the bill by proposing counter-legislation that could nullify the windfall tax.

Marina Berlusconi, the eldest daughter of former Prime Minister Berlusconi, publicly criticized the windfall tax bill at the Confindustria general assembly, Italy's association of industrialists, on the 15th. She pointed out that "the definition of excess profits is exposed to various doubts and criticisms and is highly provocative," and warned that the bank windfall tax could deter foreign investment.

Earlier, on the 7th of last month, the Italian government approved a special law at a cabinet meeting to temporarily introduce a windfall tax on commercial banks this year. The plan was to impose a one-time tax at a 40% rate on banks that earned huge additional profits by sitting idle amid prolonged high interest rates. The tax targets commercial banks whose net interest income has increased by more than 10% compared to two years ago. The special law for the windfall tax is set to be implemented after parliamentary approval this week.

Currently, among EU countries, the Czech Republic, Lithuania, and Spain impose windfall taxes on banks, and Latvia is also pushing to introduce such a tax. The windfall tax is intended as a burden-sharing measure targeting companies that earn excess profits due to external factors, but there have been pros and cons due to issues such as double taxation, tax fairness compared to other industries, and anti-market logic.

This content was produced with the assistance of AI translation services.