Iceland plans higher financial-sector taxes despite industry backlash

Icelandic authorities plan to raise special taxes on financial companies, a move the Financial Services Association of Iceland says is a bitter disappointment, mbl.is reported. The proposed taxes are expected to raise 31 billion Icelandic krónur next year, according to the budget bill presented on Monday.

That is 7.5 billion krónur more than was projected in this year’s budget. The largest increase is a 75% rise in the tax on financial companies’ debt, from 0.145% to 0.254%. The tax is expected to generate 13.85 billion krónur for the state after the increase.

A new KPMG analysis for the association says Iceland already stands out in Western Europe. Following the increase, special taxes on Icelandic banks will be about seven times higher than the Western European average when measured as a share of assets, up from just over five times higher.

Heiðrún Jónsdóttir, the association’s managing director, said Iceland was also the only country in the comparison to impose special taxes simultaneously on banks’ debt, profits and wages.

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

In addition to a 20% general income tax, a 5.5% special tax on wages and other special charges, financial companies pay an additional 6% income tax on profits exceeding one billion krónur. Since 2021, government revenues from financial companies’ operations and ownership have amounted to about 700 billion krónur at current value, according to the association.

Jónsdóttir said it was difficult to argue that the state budget deficit in recent years was caused by insufficient revenues from financial activities. She said the International Monetary Fund and the Central Bank of Iceland had warned about taxes on debt because of their negative economic effects.

The association said the government had not shown that the tax increase was the most effective way to achieve balanced budgets. It also said further taxation worked against other government goals, including improving competitiveness and attracting foreign investors.

The association has repeatedly requested analysis and an assessment of the effects of the increase, but said no such assessment had been presented. It also criticised the proposal for being announced at short notice and without consultation, saying predictability in tax matters was important for investment, financing and the competitiveness of Icelandic businesses.

The debt tax was originally introduced after the financial crash. According to the association, the International Monetary Fund concluded about a decade ago that the state had already recovered the direct cost of rebuilding the banking system.

In a Gallup survey conducted for the association this summer, a majority of respondents said the proposed tax increase would have a negative impact on the public, bank customers and shareholders, while having a positive impact on the state treasury.