Professional content

Effective tax-system = foreign investment

5.4.2012 Andri Gunnarsson og Páll Jóhannesson

Foreign investment in Iceland today is historically low. In this small and remote island, authorities seem to believe that foreign investors are interested in pursuing business here without any tax incentives. On the contrary, tax authorities need to deviate from narrow and conservative interpretation of tax law and go further in placing preferential policies without violating Iceland's obligations according to the EEA Agreement

In recent months, the lack of foreign investment in Iceland has been much discussed as it is at historical lows. Nowadays, Iceland is often compared to Ireland, which successfully has been able to attract foreign investors. The question of what we are doing wrong in this regard has been discussed a lot between those who work within the tax field. 

Many small countries, although most are larger than Iceland, have focused on ensuring that their tax system attracts foreign investors in order to be competitive with larger countries that offer additional human resources and a larger market. Some of these countries go further than others, as an example countries within the European Union including Ireland, Malta, Luxembourg and Cypress. What all these countries have in common is that they regard it beneficial to broaden the tax base as much as possible rather than torment their tiny population with tax. Larger countries within the European Union have also seen the beneficial of attracting foreign investment through favorable tax rules. 

Fore some reason Icelandic authorities seem not to notice the same benefit from favorable tax rules, despite that Iceland is even smaller and remote than the countries mentioned above. The government seems to believe that foreign investors see their benefits in investing here without any tax incentives. It is natural that larger markets can afford to rely on that business will flourish without any incentives, such as the United States, Germany and other bigger countries in the world. The reason is that these markets are large and varied. 

Both the legislator and the Icelandic tax authorities seem very fixed on having no specific tax rules in order to attract foreign investors. It should be noted that tax authorities appear to have a major impact on the legislator's enactment of tax legislation. Tax authorities are reluctant to let go of conservative principles that have been enacted by larger countries, which are good for them, but not for a small and remote country as Iceland. The reasoning is often that special rules may on one hand be a ,,style-fraction” of the Icelandic tax system and second, such rules may violate the EEA Agreement. However, for some reason these two reasons seem not to bother other countries, which also are members of the European Union, unlike Iceland. In this context, quite a few ,,style-fractions” have been made to the Icelandic tax system in last three years, which have had an inhibitory affect on investments. 

In those cases the legislator has tried to set preferential policies in Iceland it has generally been done with more caution than our neighbor countries, either by the legislation itself or vastly narrow and conservative interpretation of the tax authorities of tax law. It is obvious that if we want to do something about this, we must go further than our neighbor countries as we cannot ignore the fact that we are a small isolated island. 

With this article the authors are trying to point out that if the government wants to attract foreign investors, it must enact favorable change to the tax system like most small countries around us are doing.