After being on the receiving end of multiple lawsuits in the United States this year, ExxonMobil is finally having its chance on the plaintiff’s podium, albeit in Europe.
The American multinational oil and gas corporation is the largest oil company headquartered in the Western world and one of the world’s largest companies by revenue.
Now, ExxonMobil’s subsidiaries in Germany and the Netherlands are taking the EU to court, arguing that the EU has overstepped its authority by setting a bloc-wide levy on the surplus profits reaped by energy companies as a result of Russo-Ukraine war. The lawsuit was filed on Wednesday at the European General Court in Luxembourg.
This is the most significant response yet from the oil industry against this “windfall tax,” but is it viable? And what does this lawsuit mean for Europeans this winter?
What is the EU’s “Windfall Tax”?
Windfall profits are large, unexpected gains resulting from lucky circumstances that are usually well above historical norms and often occur due to factors such as a price spike or supply shortage. A windfall tax is a tax levied by governments on these profits, which most often occur in commodity-based businesses.
Before Russia’s invasion of the Ukraine, Russia was a major supplier of European energy, particularly oil and natural gas, providing around 45% of Europe’s total gas imports.
After the war broke out, the conflict, attempts to limit the imports of Russian goods, and Russia’s own purposeful manipulation of the European energy market sent fuel prices spiking.
This in turn fuelled inflation and exacerbated the cost of living crisis, whilst allowing energy companies simultaneously to reap record profits. ExxonMobil posted third-quarter 2022 earnings of $19.7 billion and second-quarter earnings of $17.9 billion. Compare this to third-quarter earnings in 2021 of $6.8 billion and second-quarter earnings in 2021 of $4.7 billion.
In September, the European Council, the executive branch of the EU, passed a set emergency measures to reduce energy prices, one of which was a plan to redistribute these earnings among those who were struggling to pay their bills as a result of the same high energy prices that were allowing companies to post record numbers.
The new tax is due to take effect from December 31 and will apply a levy of at least 33% on any taxable profits in 2022-23 that are 20% higher than average profits between 2018 and 2021.
The European Council imposed this measure by relying on the authority of Article 122 of the Treaty on the Functioning of the European Union. This article reserves for the European Council the right to adopt economic policy “measures” (including regulations) based on a Commission proposal via a majority vote without those measures being passed by the European Parliament, the legislative branch of the EU.
According to Article 122, this is to be done “in a spirit of solidarity between Member States, upon the measures appropriate to the economic situation, in particular if severe difficulties arise in the supply of certain products, notably in the area of energy.”
This is one of the first instances of the EU using Article 122 for emergency energy legislation, which makes the lawsuit a potential test case.
The EU has used this emergency procedure before to mandate minimum natural gas storage levels, cuts in winter electricity and gas use, the joint purchasing of gas supplies, and a maximum cap on wholesale natural gas prices within the bloc.
Exxon’s Argument and the EU’s Response (So Far)
Exxon’s lawsuit argues that the European Council lacks the authority to impose the tax, since powers of taxation traditionally have lain with the national governments of the EU’s Member Nations.
Some are also arguing that, by choosing to describe the levy as a “solidarity contribution,” the EU attempted to thinly veil a measure of indirect taxation that it understood was outside the scope of its power.
According to the multinational American law firm Cleary Gottlieb Steen & Hamilton, the weakness of this policy from a legal point of view is that:
“The application of Article 122 TFEU to a solidarity contribution… allows the EU to adopt a decision that might otherwise be considered as falling in the field of fiscal policy and requiring unanimity voting under Article 113 TFEU for the harmonisation of legislation concerning indirect taxation. It remains to be seen whether this precedent, which grants the EU a form of exceptional and temporary taxation competence, will be followed by others and further extended in time in the context of the energy crisis.” (Bolding added)
Part of the issue is the question of majority voting versus unanimous voting. In order to apply Article 122, the European Council simply needed a majority vote, rather than the unanimous vote that would be necessary to pass a regulation to harmonise legislation concerning indirect taxation.
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In statements released about the lawsuit, Exxon has tried multiple approaches to defend their side. They have tried rationalising, by arguing that their recent expansion of refining processes in Europe is helping to increase supply and reduce dependency on Russia:
“The expansions and improvements in Antwerp and Rotterdam have helped us achieve our best global production rates since 2008. We’re delivering more energy products at a time when Europe struggles to reduce its energy imports from Russia.”
They’ve also tried threatening, by letting Europe know that this measure will affect whether Exxon chooses to invest in the area in future, saying:
“Looking forward, as we consider future multi-billion Euro investments in Europe’s energy supply and transition, we look for strong business cases underpinned by a stable and predictable investment climate. Whether we invest here primarily depends on how attractive and globally competitive Europe will be. We will continue to work with EU leaders to address these issues. Thoughtful policy is critical.”
The EU responded in slightly more demure terms. European Commission spokesperson, Arianna Podesta said in a statement: “The Commission maintains that the measures in question are fully compliant with EU law.”
The European Commission simply said it took note of the lawsuit.
Similar lawsuits have already taken place within EU Member Nations. In Italy, ERG, a wind power company, brought a challenge over a similar windfall tax which was dismissed in court. The Spanish oil and gas group Cepsa has also threatened to sue Madrid over a similar levy in Spain.
What will the outcome entail for both Europe and the oil industry?
The lawsuit will not prevent the legislation from taking effect on Saturday, and without any time limits imposed on the court to decide the case, it could be years before a judgement is pronounced.
If the general court dismisses the lawsuit, Exxon, and its competitors, will have to pay the 33% levy. ExxonMobil’s chief financial officer estimated that the company’s tax liability could amount to “over $2 billion.” This would amount to just over 10% of their Q3 profits alone.
Since Exxon are moving to annul the regulation in its entirety, if they were to win, the measure would be written off the books. Whether the EU would be liable in that case for any tax that had been paid whilst the lawsuit awaited a judgement is unclear.
The European Commission estimates the temporary measure could bring in up to €25 billion, which would be redistributed by member countries “to help bring down energy bills.” As of September, €600.4 billion had been earmarked by EU countries at the national level to shield customers from rising energy costs.
Whilst the revenue expected from this windfall tax would only help to alleviate a small percentage of the financial burden of this socio-economic energy strategy, it could set a precedent for private companies to undermine emergency powers invoked under Article 122.
For now, the levy will start generating revenue from the new year, and Europeans can watch the power of balance swing, however marginally, in the direction of the people, whilst Exxon sulks in the corner with its leftover billions in profit.
Editor’s Note: The opinions expressed here by the authors are their own, not those of Impakter.com — In the Featured Photo: ExxonMobil Logo. Featured Photo Credit: Screenshot from Youtube.
