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Final Report Designed for Develop the Finnish Tax System Could Lead to Drastic Changes
On 21 December 2010, the working group (headed by Mr Martti Hetem?ki) set by the Ministry of Finance published a final report presenting the proposed changes for developing the Finnish tax system on a general level. The final report is a follow-up for the interim report published in June 2010. Taxand Finland highlights the most significant corporate tax and individual tax related issues.
The working group proposes that the emphasis of taxation can be transferred modestly from taxation on work to taxation on consumption. This would be implemented by reducing taxation on earned income at all income levels (e.g. the highest marginal tax from 55% to 50%), by raising both reduced tax rates and the standard tax rate by 2% units in value-added taxation (e.g. the general VAT rate from 23% to 25%), and by increasing excise taxation (on top of the already enacted changes in environmental taxation taking effect as of 2011. The increases would target taxes especially on fuel and electricity, vehicles, alcohol, sweets and ice-cream, refreshment drinks - possibly also other sugary products later on).
The working group proposes, with respect to corporate and capital income taxation, a modest shift from corporate income taxation to personal-level capital income taxation. The corporate income tax rate is proposed to be reduced from 26% to 22%, whereas the individuals' capital income tax (applicable to e.g. capital gains, interest income and a part of dividend income) would be increased from 28% to 30%.
As part of this change, the partial tax exemption of dividends received from listed companies is proposed to be abolished so that the entire amount of dividends would be taxable as capital income for private individuals (now only 70%).
Tax exemptions of dividends from unlisted companies are proposed to be removed and replaced with reduced taxation of the "normal return" of the dividend. The amount of tax-exempt normal return would correspond to the interest rate of mid-length state bonds after tax. Of the dividend amount exceeding the normal return, 35% would be taxable at the capital income tax rate of 30%.
In accordance with the analysis obtained by the working group, the aggregate changes in the taxation of dividends taking into account the proposed changes in the corporate income taxation and individual taxation would shift the emphasis from the taxation of the company to its owners, however it should not affect the total tax burden on dividends in general. Those having been able to utilise maximum tax-exempt dividends might nevertheless suffer from the change. It should be noted that the working group has not touched the current tax status concerning dividends received by companies, so the main rule of such dividends being tax-exempt should not be altered in the near future based on the report.
The working group has not proposed changes for restricting the deductibility of interest expenses in corporate taxation.
With respect to taxation on housing, the working group proposes that the proportion of deductible interest expenses be gradually reduced by 5% units each year.
The working group's proposals with respect to inheritance and gift taxation relate to adjusting the tax scale to correspond with current wealth conditions as well as to broadening the tax base. The inheritance tax would be partly increased and partly decreased. Tax benefits related to savings insurance policies are proposed to be abolished. Certain changes are also proposed concerning taxation of changes of generation.
The working group has assessed that the proposal should not affect the overall tax burden in Finland.
The report is expected to form the basis for the political discussions following the general election in Finland in spring 2011. Obviously much will depend upon the outcome of the election and the political situation. Thus, it is uncertain whether the proposed changes will be adopted and to what extent, and in any case no changes are expected to come in force at least prior to 2012. Nevertheless, for companies having activities in Finland it is worth following the developments as drastic changes in the tax system might call for actions before the changes enter into force.
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