Professional content

Stefán Ólafsson and the tax discussion


Are Icelandic companies being tax tormented in comparison to other countries? It is misleading to focus solely on tax rates when discussing how high or low taxation here is. A comprehensive picture of the taxation of Icelandic companies compared to other countries can only be built by considering many factors and therefore not only by comparing tax burden here to large countries, as in such countries were analogous.

Last Thursday, Mr. Stefan Olafsson professor published on this website ,,” an article entitled “Tax torment of Icelandic companies?”. 

In his article, Stefan doubts that Icelandic companies are particularly tax tormented in comparison to other countries and specifically mentions two facts to support his statement. First, he specifies that in Iceland, tax rate on business profit is 20%, which according to him is the sixth lowest in the OECD. Secondly, he mentions what corporate income tax returns to the Treasury, as a percentage of GDP in OECD countries and indicates that Iceland has been the fourth from the bottom in 2010. Stefan's article shows how misleading it is to only focus on tax rates when discussing how high or low taxation is in individual countries.  

Certainly, both these facts are relevant when taxation of companies is discussed but it is the authors' opinion that they do not give a complete picture of the taxation of Icelandic companies in comparison to other countries. There are mainly four reasons: 

  1. The corporate income tax is only one form of taxation imposed in companies in Iceland. Payroll tax, contribution to pension funds, fishing taxes, financial administration taxes and a variety of other taxation takes place, both general and specific to individual industries. Special notice should be paid to the discussion of payroll tax and contribution to pension funds, as these fees are paid regardless to whether the company is run with profit or loss. In many of the countries Stefan mentions, such fees are not collected or paid by the employee. 
  2. Taxation of shareholders in the referenced countries may vary. Thus, the overall taxation of profits created from operations of the company and is paid out in dividends to shareholders in the country ranges from 20-50%. Dividends in other countries can be used for example deduction for the payer and/or only taxed when exceeding certain amounts. In Iceland, dividends are in some cases taxed as wages without being deductible for the payers. Such rules change dramatically the taxing of corporate profits from the shareholders perspective 
  3. In some of the countries there are progressive taxation on enterprises, as well as some income are not counted in the tax base or only part of the income is considered as part of the tax base (e.g. patents). For example in the Netherlands, a tax level of 25% is applied on profits that exceed 200.000 Euros. Lower profits are taxed with 20%. 
  4. Due to special circumstances, taxes paid by Icelandic companies in 2010 give a crooked picture of the impact of the Icelandic tax system on corporate taxation. At that time, a dramatic decline was in almost all industries as well as the currency drop affected tax loss of Icelandic companies. 

In order to compare taxation between countries one needs to consider many other factors as previously mentioned above. 

It has been pointed out that comparing tax burden in Iceland with large countries such as Germany, as those countries were similar, is impossible due to the fact that the latter country has a market with over million inhabitants, which companies all over the world participate in order to sell products and services. Thus, the size of the market shapes taxation on profits. Likewise, taxation of companies in Iceland should aim for attracting hereto companies that amongst other things export goods and services to other larger markets.