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Taxation Working Group Proposes Key Changes to Taxation
The taxation working group, appointed by the Ministry of Finance and led by Mr. Hetem?ki, has in its interim report proposed key changes to taxation. The main changes proposed range from the taxation of corporate income to taxation of personal capital income and include widening the tax base, lightening the taxation of work and shift of focus from direct taxes to consumption taxes. Taxand Finland reviews the key changes proposed by the taxation working group.
The working group proposes to lighten the marginal rates of income. The highest marginal tax is to be reduced to approximately 50 per cent. Correspondingly the tax rate of capital income is proposed to be increased from 28 per cent to 30 per cent. The working group does not propose changes to the tax base of capital income (other than dividend taxation, as explained below).
The working group proposes the corporate income tax (CIT) rate be reduced from 26 to 22 per cent. Regarding new tax incentives for research and development, the working group has taken a negative stance. The interim report does not propose implementation of interest deduction limitations or changes to the write-offs of fixed assets. Limitations to interest deductions will be addressed by the group at a later date.
The interim report proposes the taxation of dividends from both listed and unlisted companies be changed for private individuals placing them as dividend recipients. It is proposed the 30 per cent tax-exempt part currently in effect be abolished for listed companies, i.e. the whole dividend from a listed company would be taxed as capital income. Thus, the overall tax burden for profits distributed as dividends would total 45.4 per cent.
Only 35 per cent of dividends from unlisted companies that do not exceed a so called normal return of dividends would be taxed as capital income. 100 per cent of dividends above the normal return would be taxed as capital income. The normal return would correspond to the interest rate of medium-term state loans after CIT (working group calculations are made with 3.9 per cent), and the normal return would be calculated, as it is today, on the mathematical share value. The implementation of the model would lead to the increase of marginal rates for dividends received from unlisted companies. The new rates being approximately 30.2 per cent for the normal yield and 45.4 for dividends above the normal yield.
Furthermore, the working group proposes a shift of focus of taxation towards consumption tax by increasing the general value added tax rate to 25 per cent, the tax rate of food and restaurant services to 15 per cent and the tax rate of certain subsidised products to 11 per cent. The working group long term aim is the unification of consumption taxation. As a first step, the reduced rate for food and restaurant services could be considered to be abolished.
The working group will address matters relating to excise tax, real estate tax and taxation of housing more thoroughly in its final report and will prepare an estimation of the total effect of the proposed changes.
The final report will be completed by the end of the year. Any potential tax reforms will be introduced from Spring 2011 onwards. It remains to be seen what the next government will put into action.
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