Towards a more coherent tax system
To fund the expenditure pressures arising from population ageing, Finland needs as high an employment rate and as strong productivity development as possible. The taxation structure should also support as much as possible employment, productivity and economic growth. This is the message of the interim report of the Working Group for the Development of the Finnish Tax System, which was submitted to the Ministry of Finance on 21 June 2010.
Corporate and capital income taxation to answer the challenges to the economy
The working group has set as the objective of its proposal on corporate and capital income taxation that taxation would be as neutral as possible in relation to investments and their funding. At the same time, the aim is to reduce incentives to shift income from earned income to capital income. The working group also considers it important that the reform does not create for companies or households unreasonable adjustment requirements. The corporate tax rate should be internationally competitive, support Finland?s position as a destination country for direct investments, and strengthen domestic companies? willingness to keep their head office functions in Finland. Furthermore, it should strengthen the incentive for domestic and foreign companies to report profits in Finland.
Having evaluated the need to develop corporate and capital income taxation, the working group proposes a modest shift of emphasis in the tax burden from corporate taxation to personal-level capital income taxation. As part of this change, the working group proposes the tax exemptions on dividends received from an unlisted company be removed and replaced with reduced taxation of the normal return of the dividend. This would be implemented such that the overall taxes of the company and shareholder in terms of the tax rate of the normal return correspond to the general capital income tax rate.
The working group proposes that the corporate tax rate should be reduced from the present 26% to 22% and the general tax rate on capital income be raised from 28% to 30%. Excluding dividend income, the working group does not propose changes to the tax base of capital income taxation. According to the proposal, in contrast with the former situation, dividends received from publicly listed companies would be fully included in taxable capital income. Moreover, 35% of the part corresponding to the normal return of dividends received from unlisted companies would be included in taxable capital income. Dividend exceeding the normal return would be completely taxable capital income.
The model proposed by the working group for the taxation of unlisted companies would set tangible and intangible investments largely on an equal footing in taxation. This would enhance the allocation of resources to investment objects generating the best returns and would therefore support economic growth. The proposed model would also treat an investment in an unlisted company similarly to various taxable investment objects in the financial markets. Setting the tax rate of normal return at the level of the general capital income tax rate will also standardise the tax treatment of companies? debt and equity financing. The modest raising of personal-level capital income tax to 30% would also reduced incentives to income shifting. The proposal also aims to prevent income shifting byreducing taxation on earned income.
Reduced taxation on work
The working group proposes that the emphasis of taxation be shifted modestly from taxation on work to taxation on consumption. To fulfil employment and productivity targets, the working group proposes that tax reductions be directed at earned income. The reductions would be applied such that marginal tax rates are lowered at all income levels. The highest marginal tax rate of the central government income tax scale, however, would be lowered more than average, to around 50%. The working group proposes a reduction of earned income taxation of EUR 2 billion on a static basis.
In making its proposal, the working group has taken into consideration that population ageing will create pressure in future to increase taxation on work, particularly on local government taxation and employment pension contributions. Thus, even if the proposed EUR 2 billion reduction of earned income taxation were implemented, taxation on work threatens to increase over the longer term. The working group will continue its consideration of earned income taxation in its final report.
Increase for value-added tax
The working group proposes that, at this stage, the shift of emphasis towards consumption taxation should be implemented such that in valued-added taxation both reduced tax rates and the standard tax rate are raised by two percentage points. In value-added taxation, however, the goal in future should be towards a more uniform structure.
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The task of the Working Group for Developing the Finnish Tax System, which began its work in autumn 2008, has been to evaluate the need to develop the tax system, taking into consideration changes in the operating environment, such as population ageing, changes in sources of economic growth and challenges arising from sustainable development as well as the openness of the economy and internationalisation. The tax system must also be assessed in terms of the fairness of taxation. The objective is a tax system that better supports sustainable economic growth and the funding of public services.
The working group, in its final report to be published later, will make an overall assessment of the development needs of the tax system and supplement the present policy outlines, particularly in terms of areas of taxation not included in the interim report. The working group?s term of office continues to the end of 2010.
Further information: Permanent Under-Secretary Martti Hetemäki, tel. 358 9 160 33091