Financial Services Association Calls Planned Tax Hikes “Bitterly Disappointing”

Iceland’s Financial Services Association says it is bitterly disappointed that the government plans to raise special taxes on financial companies again. The proposed budget expects to collect 31 billion krona from such taxes next year, 7.5 billion more than this year’s budget projected.

The largest change would be a 75% increase in the tax on financial companies’ liabilities, from 0.145% to 0.254%. After the increase, that tax alone is expected to bring 13.85 billion krona into the state treasury.

The association cited a new KPMG analysis saying Iceland already stands out sharply in Western Europe. The increase would lift special taxes on Icelandic banks from slightly more than five times the Western European average to about seven times the average when measured against assets.

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This further increases a tax burden that was already heavy and weakens the competitiveness of Iceland’s financial system. Capital that goes into special taxes cannot be used for other purposes, such as strengthening lending capacity and financing investment

Heiðrún Jónsdóttir, the association’s managing director, said Iceland is the only country in the comparison that taxes banks specially on liabilities, profits and wages. “This further increases a tax burden that was already heavy and weakens the competitiveness of Iceland’s financial system,” she said. “Capital that goes into special taxes cannot be used for other purposes, such as strengthening lending capacity and financing investment.”

Financial companies already pay a 20% general income tax, a 5.5% special tax on wages and a 6% additional income tax on profits above one billion krona. Jónsdóttir also said the International Monetary Fund and the Central Bank of Iceland had warned about liability taxes because of their negative economic effects. The association criticized the short notice and lack of consultation, saying tax predictability affects investment, financing and the competitiveness of Icelandic businesses.

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The tax on liabilities is precisely the type of special taxation that, among others, the International Monetary Fund and the Central Bank of Iceland have warned about because of its negative economic effects