| AN
IMF Country Report on Iceland has advised the country's administration
to consider at least doubling the value added tax (VAT) threshold to ISK
2,000,000 (about USD 17,850 or EUR 12,900). This initiative would ease
administration and help it focus on the large taxpayers who generate
most VAT revenue.
The
Report captioned ‘IMF's technical report-Modernizing the Icelandic VAT'
has also recommended full taxation of all sales and leasing of
commercial buildings as well as of the first sales of new residential
buildings. It has also suggested elimination of special VAT refund
schemes for buses, and domestic boats and aircraft, as well as CO2 tax
refunds for rental car imports.
The
Report has also pitched for repeal the commodity tax on building
products, appliances and electronics. IMF put the report in public
domain on 23 rd September 2014, though it was authored in April.
It
has observed that Iceland's new government, elected in 2013, is
conducting a general review of its tax policy with a view toward making
it more efficient and less distortionary. The Government has targeted
VAT reform as a priority to become more reliant on consumption rather
than income taxation. The narrow base and wide gap between the very high
25.5 percent main VAT rate and lower rate of 7 percent distort economic
behaviour and encourage tax arbitrage, evasion and lobbying. The
efficiency of the Icelandic VAT is thus currently well below the
European and OECD averages.
As
put by the report, “the government plans in the near term to broaden
the base by eliminating exemptions, raising the lower rate, and reducing
the top rate. In the medium term, the government targets a single-rate
system. To offset the potentially inflationary effects of VAT reform and
reduce price distortions, the government is considering repealing the
commodity tax and reviewing the trade regime for agriculture. It may
also seek to increase social benefits for low-income households most
affected by the VAT increases.”
It
says that these measures are all in accord with recommendations made by
two previous IMF missions in 2010 and 2011. This mission reiterates its
previous recommendations that Iceland should in the near term: (1)
eliminate exemptions at least for tourism, transport, sports and
culture; (2) limit VAT refunds to local government to services that
could be outsourced; (3) double the lower rate to 14 percent; (4) reduce
the top rate as revenue permits, depending on base broadening; and (5)
in the longer term, move to a single VAT rate of about 21 percent.
|
