Lawyer challenges government’s tax loophole language

Gunnar Ármannsson, a lawyer at VHE legal, has sharply criticised the Finance and Economic Affairs Ministry’s use of the term “closing loopholes” in proposed tax changes, mbl.is reported.

The proposals, published in the government’s consultation portal, would amend various laws on taxes and charges. Gunnar said the phrase “closing loopholes” was value-laden and risked presenting tax increases or changes to tax policy as corrections to defects in existing legislation.

The government has said one of its aims is to “improve tax compliance, close loopholes and reduce exemptions in the tax system”. The impact assessment for the legislation also refers to “necessary changes” that would result in improved tax compliance, fewer loopholes and exemptions, and greater efficiency in implementation.

Gunnar said this wording appeared to assume that the existing legal provisions were substantively justified without defining what a loophole was or providing reasons for that conclusion. He also pointed out that, under the law on Iceland’s government administration, language used in its operations should be precise, simple and clear.

“The term ‘loophole’ is not a neutral term,” Gunnar wrote. Referring to a loophole in legislation implies that the law contains a defect, an unforeseen gap or a way to avoid the outcome the lawmakers actually intended, he said.

Closing a loophole therefore generally means correcting something that went wrong, according to Gunnar. He said that could be appropriate when legal provisions had unforeseen consequences or were used in ways lawmakers had not anticipated. In such cases, however, it should be explained what the loophole was, how it arose and how it was used.

That was different when lawmakers had deliberately decided that a particular group, transaction or situation should receive different tax treatment from the general rule, for example through an exemption, a deduction or a tax incentive.

“The fact that the authorities or a new parliamentary majority later decide that this decision should be changed does not make the previous arrangement a ‘loophole’,” Gunnar wrote.

Higher taxes should be called what they are

Gunnar referred to comments by Finance Minister Daði Már Kristófersson during the presentation of the budget bill. The minister said the government was taking a “mixed approach” to balancing public finances, with part of the fiscal restraint coming from the revenue side.

Gunnar said this highlighted the importance of presenting tax changes transparently.

If removing an exemption or incentive meant that a particular group would pay higher taxes, it should be described openly as a change to the tax burden and justified, he said. General references to closing loopholes could not replace such reasoning.

He specifically cited a planned reduction in VAT reimbursements for work on residential properties.