Finance firms say bank tax rise will cost 8.1 billion krona

A proposed increase in Iceland’s bank tax would cost financial companies 8.1 billion krona, rather than the six billion krona expected in extra state revenue, the Association of Companies in Financial Services (SFF) says. In a submission on the plan, reported by mbl.is, the association called the increase an ill-considered quick fix with potential long-term consequences.

The proposal would raise the special tax on financial companies from 0.145% to 0.254%, an increase of about 75%. The government expects the change to bring in an additional six billion krona next year.

The tax applies to financial companies’ debts above 50 billion krona and cannot be deducted from income tax. SFF says this is why the increase would amount to 8.1 billion krona for the companies. The association argues that if the tax increase is intended to address temporary circumstances, it should also be temporary, with a sunset clause that would end it automatically after one or two years.

“It is a decade since the International Monetary Fund estimated that the Icelandic state had recovered the direct cost of rebuilding the financial system, and more,” SFF managing director Heiðrún Jónsdóttir told Morgunblaðið. “Despite that, the tax remains in place and the law has not changed.”

Citing Central Bank of Iceland data, SFF says customer deposits make up 63% of the liabilities of systemically important commercial banks, with households holding 52% of those deposits. The association says the tax is therefore largely calculated on funding from customer deposits.

SFF also questions whether six billion krona in additional tax revenue would represent a net six billion krona gain for the state. The state owns about 40% of the banking system through Landsbankinn, pension funds own about 29% and individuals directly own about 10%, the association says. It argues that higher taxes could reduce Landsbankinn’s dividend payments to the state and affect the value of the state’s stake.

Jónsdóttir said the government had not assessed the overall effects of the increase on the economy and public finances. She also said the plan had come without adequate notice: more than a year ago, the state sold a stake in Íslandsbanki to 31,000 Icelanders, but the sale process did not mention a planned increase in the bank tax.