Iceland To Alter Interest Tax Credit System

by Jason Gorringe, Tax-News.com, London

24 April 2009

The Icelandic Finance Ministry’s Weekly Web Release outlined proposed changes in the interest tax credit system, as set out in a bill before the Icelandic Parliament (the Althingi), in late March. In the bill, it was proposed that the maximum interest tax credit be raised by 55% along with a 25% increase in the maximum credit amount. Furthermore, it was proposed that the income curtailment ratio be raised from 6% to 7.5%, so that the interest tax credits would primarily reach lower-income families. The cost to the Treasury of these amendments was estimated at close to ISK2bn (USD15.4m), in addition to the ISK8bn (USD61.7m) in interest tax credits already approved in the Treasury budget for 2009. It should also be recalled that one of the underlying assumptions of the 2009 budget is that reference amounts of the interest tax credit system would increase by 5.7%.

The above bill has now been passed into law by the Icelandic Parliament, albeit with certain amendments. The proposal to raise the income curtailment ratio from 6% to 7.5% met with considerable opposition, since in certain instances taxpayers could have been worse off after the amendment in spite of a sharp increase in interest payments. It was also pointed out that the interest payment burden of many families had generally been increasing in recent months due to rising payment difficulties, in part because of costly short-term borrowing. This made it more common that the average interest payment exceeded the 5% maximum in the existing interest tax credit system.

In light of these and other observations, the final bill was amended. Instead of raising the maximum amount of interest paid, used as a basis for calculating the interest tax credit, by 25%, the maximum ratio of interest payments to debt was increased from 5% to 7%. The proposal to increase the income curtailment ratio from 6 to 7.5% was rescinded, and the intention of increasing the maximum amount of interest by 55% was modified to 30%. With these amendments, the goal was reached that interest credit payments according to the amended system would never be lower than according to the older system.

As a result, the maximum interest credit of married or co-habiting couples increases from ISK314,100 (USD2,420) – the amount assumed in the 2009 budget – to ISK408,400, an increase of ISK90,000, with the corresponding amounts for single persons and single parents of ISK57,000 and ISK73,000. This increase comes, as noted before, on top of the 5.7% increase assumed in the budget. This means that the maximum interest credits to married or co-habiting couples increase by ISK111,000 between the years 2008 and 2009. The increase in cost to the Treasury is estimated about the same as before, about ISK2bn. It should be borne in mind, says the Finance Ministry, that this is a one-time, non-recurring measure, intended to ease the burden on households. The calculation of interest credits will, as usual, take place with the assessment of public imposts on August 1.

From the above discussion, it is apparent that the Icelandic interest tax credit system is quite complicated, subject to many different constraints and parameters, such as income, debt, interest payments, net assets and, last but not least, the marital status of the interest tax credit beneficiary. Such systems are inevitably subject to questions regarding the need for simplifications and better transparency in the interest of beneficiaries, concluded the Icelandic Finance Ministry’s guidance note.

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