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Finland's Tax Working Group Presents Final Report

by Ulrika Lomas, Tax-News.com, Brussels

27 December 2010


The working group for developing Finland’s tax system has delivered its final report to the government, in which it proposes a modest shift of emphasis from taxation on work to taxation on consumption.

In the proposal, the reduction of taxation on personal and corporate incomes would be EUR2bn (USD2.6bn) and EUR0.8bn, respectively. Those reductions would be financed by increases in value-added and capital taxation, by raising excise duties and by restricting the deduction of interest expenses. Excluding any positive impact on employment and growth, the short-term effects on revenue of the tax increases and reductions were said to be neutral.

It was added that, especially in the long term, the ageing of the population will tend to increase taxation on work, particularly through municipal income tax and employment pension contributions. High employment and productivity growth will therefore play a key role in ensuring the sustainability of general government finances.

As a consequence, reductions of taxation on individual incomes would be targeted at earned income to achieve employment and productivity targets. The average tax rates on earned income would be lowered at all income levels, while the highest marginal tax rates would be reduced to around 50%.

The basic value-added tax rate and the two reduced tax rates would rise by 2%, while energy and environmental taxation would be increased by way of the basic tax on motor vehicles, the tax on consumer electricity, and transport and heating fuel taxes, while there would also be a windfall tax on electricity production. The taxation of products harmful to health would also rise through increases in the excise duty on soft drinks, sweets and ice cream, and alcohol.

The corporate income tax rate would be reduced from the present 26% to 22% and the general tax rate on capital income raised from 28% to 30%. The tax exemptions of dividends received from an unlisted company would be removed and replaced with the reduced taxation of normal dividend returns. Dividends received from publicly listed companies would be fully included in taxable capital income.

In addition, the proportion of deductible interest expenses on housing loans would be gradually reduced by 5% per year. Thus, after four years, 80% of interest expenses on housing loans would then be deductible. In the long term, it is thought that the right to deduct housing loan interest should be removed completely.

Corporate income tax revenue would be transferred from local to central government, and municipalities would be compensated for revenue losses arising from this through a system of central government transfers. This would then be reviewed to ensure that municipalities would have better opportunities to use the real-estate tax. The objective would be to raise real-estate tax revenue by 50%; an increase in tax revenue of around EUR600m.

However, subsequently, the emphasis would be transferred gradually from the real-estate tax to a land tax, and tax rates determined for land separately. The lower limit of the tax rate on land would be raised 0.2% to 0.8%.

Finally, with regard to inheritance and gift taxation, the limits at which the 10% and 13% tax rates apply would be raised. In addition, a new 16% tax rate could be introduced, directed only at very large inheritances and gifts. The current exceptions relating to the valuation of life insurance savings and corporate assets in inheritance and gift taxation would be removed.

TAGS: inheritance tax | environment | tax | investment | value added tax (VAT) | property tax | corporation tax | excise duty | tax rates | gift tax | Finland | dividends | individual income tax

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