The unconstitutionality of the Italian Robin Hood Tax: it is a matter of design (again)
(IBFD and Maastricht University)
We are getting used to an unacceptable trend: Legislators introduce ill-designed taxes and the judges “put a patch on it”. This is exactly what happened in Italy a few weeks ago with the so-called Robin Hood Tax: the judges considered it in breach of the Italian Constitution due to its design.
The Robin Hood Tax was introduced in 2008. It is a surtax applied on top of corporate income tax for companies operating in the energy sector. The reasons behind the introduction of the Robin Hood Tax were clear cut and explicitly stated in the law. More specifically, the tax was introduced to overcome the tough economic times Italy was facing and it was aimed at hitting excess profits of energy companies caused by the exceptional increase of the cost of the oil.
The compatibility of the Robin Hood Tax with the Italian Constitution was challenged because it was considered to be in breach of the principles of equality and ability to pay enshrined in articles 3 and 53 of the Italian Constitution. On the 11th of February 2015, the Constitutional Court declared the Robin Hood Tax unconstitutional because, notwithstanding the legitimate goal the Legislator wanted to achieve with this tax, the design of the tax is not coherent with its goal.
The interesting starting point of the reasoning of the Constitutional Court is that, as a matter of principle, the Legislator can deviate from the general tax framework and introduce a different tax treatment for specific economic sectors without breaching the principles of equality and ability to pay enshrined in the Italian Constitution. However, these deviations must be reasonable, justified and not arbitrary. In this sense, it is fundamental to verify the internal coherence of the structure of the tax with its tax object.
In the case at stake, the peculiarities of the energy and oil sector can legitimate a special tax regime for companies operating in this sector. The reason is twofold: it is an oligopoly sector where there is scarce competition and energy is an inelastic product. Consequently and in abstracto, the higher profitability of energy companies compared to companies operating in other sectors can justify, especially when there are exceptional economic difficulties to overcome, a different tax treatment.
However, the Court points out that the possibility of introducing different tax treatments has to be linked to an adequate and objective justification that needs to be “coherently, proportionally and reasonably” enshrined in the structure of the tax. According to the judges, this is not what happens in the case at stake.
The decision of the Court is based on two grounds: the tax base of the Robin Hood tax and its duration. As for the tax base, the Robin Hood tax hits the entire income of energy companies and not only the excess profits. In other words, the legislator does not introduce a mechanism to tax excess profits at a higher tax rate but he subjects the whole income to a higher tax rate. As for its duration, the tax is not limited in time and it will not be repealed when the tough economic times end. On the contrary and notwithstanding the exceptional reasons behind its introduction, the Robin Hood tax is permanent. Therefore, as mentioned, the tax is not able to achieve the legitimate goal that the legislator had in mind and, consequently, the Robin Hood tax is unconstitutional.
Last but not least, the Court decided that this decision cannot be applied retroactively and, therefore, a refund of the surtax already paid cannot be claimed. According to the Court, a retroactive application of the decision could breach the balanced budget obligation enshrined in article 81 of the Italian Constitution and it can create regressive effects breaching the solidarity principle enshrined in articles 2 and 3 of the Constitution. In the case at stake, this conclusion seems reasonable and based on good sense so that the Legislator’s superficiality does not have harsh consequences on society at large. However, it is important to point out that this conclusion – not making the Legislator accountable for his decisions and overlooking the role of our Constitutional rights – could also create negative effects.
 It is worth mentioning that, at first, an exemption for renewable energy companies was introduced; but in 2011 the Legislator decided to remove this exemption.