Tax change would raise housing construction costs

Reimbursement of value-added tax on labour for residential construction is set to fall from 35% to 20% under the Icelandic government’s unchanged 2027 budget proposal, mbl.is reports. The change would increase the tax burden on construction, potentially raising building costs and putting upward pressure on housing prices.

Finance Minister Daði Már Kristófersson was asked whether increasing the burden on construction was appropriate given moderate economic growth, a decline in total capital formation and uncertainty surrounding investment.

He said the reimbursement had originally been introduced mainly to reduce undeclared work, rather than to stimulate the construction industry.

“The original idea was mainly to try to reduce undeclared work. So I think it is important to bear in mind that this was the objective, not to stimulate the construction sector,” Daði Már said.

The minister said he was not generally in favour of tax incentives and argued that the value-added tax system had become increasingly complicated through various exemptions and concessions.

“As I have often said, I do not think it is a good approach to use the value-added tax system to achieve all kinds of additional political objectives,” he said. Daði Már added that he would rather simplify the system than continue making it more complex, including by removing exemptions.

Asked why tax-system simplifications appeared to increase the burden on people and companies rather than reduce it, he said pressure was always moving in one direction.

“No one is asking for higher value-added tax, but there are long queues of people asking for lower value-added tax. That means that grumblers like me are simply fighting in the other direction,” he said.