New Taxation System Presented in Iceland Skip to content

New Taxation System Presented in Iceland

By Iceland Review

Taxes will be raised at the beginning of next year, as the government announced yesterday. A three-step income tax will be adopted, including that those who earn more than ISK 650,000 (USD 5,200, EUR 3,500) per month will pay 46.1 percent of their salaries in income tax.

The government offices. Photo by Páll Stefánsson.

“Although taxes will increase considerably, we believe that we are establishing a more just taxation system, where the burden is distributed more equally, just and fair than the current taxation system,” said Prime Minister Jóhanna Sigurdardóttir at a press conference.

The tax percentage on monthly salaries lower than ISK 200,000 (USD 1,600, EUR 1,100) remains at 37.2 percent, while those who earn ISK 200,000-650,000 per month will pay ISK 40.1 percent of their salaries in taxes, RÚV reports.

Additionally, the tax-free limit will be raised from ISK 113,000 (USD 907, EUR 610) per month to ISK 119,000 (USD 955, EUR 642).

This means that a person earning ISK 180,000 (USD 1,400, EUR 971) per month will pay ISK 2,000 (USD 16, EUR 11) less in income tax than with the current system, down from ISK 22,077 to ISK 20,077.

A couple, who each earn ISK 350,000 (USD 2,800, EUR 1,900) per month, will together pay ISK 4,701 (USD 38, EUR 25) more in income tax, up from ISK 175,990 to 180,691.

A couple, who each earn ISK 700,000 (USD 5,600, EUR 3,800) per month, will together pay ISK 31,001 (USD 249, EUR 167) more in taxes, an increase from ISK 436,390 to ISK 467,391.

Other taxes will also be raised. For example, the government assumes that the liter price of gasoline and diesel oil will increase by ISK 5 (USD 0.04, EUR 0.03) next year.

Furthermore, the value-added tax system will be changed. The general VAT will increase from 24.5 percent to 25 percent.

A new 14 percent taxation step will be created for sweets, biscuits, cakes and a number of beverages, up from the current seven percent. However, the VAT on general food products will remain at seven percent.

Margrét Kristmannsdóttir, chairperson of the Federation of Trade and Services, is discontented with the new VAT system.

“What we are against is this consumption control. We don’t want some random person deciding whether we should eat apples or biscuits, we want all food products to be in the same taxation step,” Kristmannsdóttir said.

A new carbon tariff is intended to deliver an annual sum of ISK 2.5 billion (USD 20 million, EUR 13 million), while new energy, natural resources and environment taxes will deliver ISK 1.9 billion (USD 15 million, EUR 10 million).

The heavy industry sector is the biggest contributor with a total sum of ISK 1.6 billion (USD 13 million, EUR 9 million) per year.

The payroll tax will increase by 1.6 percent, capital tax by three percent and a special asset tax of 1.25 percent will be introduced on couples who have assets in excess of ISK 120 million (USD 963,000, EUR 648,000) and individuals who own more than ISK 90 million (USD 722,000, EUR 486,000).

The new asset tax will deliver ISK 3 billion (USD 24 million, EUR 16 million) to the state treasury.

Overall, these taxation changes will deliver ISK 50 billion (USD 401 million, EUR 270 million) more in revenue than is currently the case.

Chairman of the Progressive Party Sigmundur Davíd Gunnlaugsson said this increase in revenue is optimistic, because at the same time, households and companies are being burdened directly and indirectly at the worst possible time.

Indirectly because higher prices of products will increase the mortgages, Gunnlaugsson explained, reasoning that these measures will further mass emigration, prevent foreign investments and the arrival of foreign tourists.

All of these sacrifices are being made to accumulate an amount which will only suffice to pay the interests of the loans taken to repay the Icesave deposits to keep the European Union happy, Gunnlaugsson claimed.

Chairman of the Independence Party Bjarni Benediktsson agrees. “We suggested another solution. So I cannot comprehend why the government chooses to go this way when there are other options that we have been raising awareness of.”

One of the alternatives is a temporary capital tax on pension funds.

Click here to read more about that idea.

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