The taxation working group, appointed by the Ministry of Finance and led by Mr. Hetemäki, has in its intermediate report (35/2010) proposed key changes to taxation. The main themes of the intermediate report are widening the tax base, lightening the taxation of work and shift of focus from direct taxes to consumption taxes. The focus of income tax is proposed to be slightly shifted from taxation of corporate earnings to taxation of personal capital income. The key points of the working group report are presented in brief in the following.
Taxation of personal income
The working group proposes the taxation of earned income be lightened as regards marginal rates. 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.
Corporate taxation
The working group proposes the company tax rate be reduced from 26 per cent to 22 per cent. As regards introduction of new tax concessions for research and development, the working group has taken a negative stance. The intermediate report does not propose implementation of interest deduction limitations or changes to the write-offs of fixed assets. As regards limitations to interest deductions, the group suggests they be addressed later.
Reform of taxation of dividends
The intermediate report proposes the taxation of dividends be changed for both listed and unlisted companies. As regards listed companies, it is proposed that the 30 per cent tax free part currently in effect be abolished, meaning that the whole dividend would be taxed as capital income. Thus, the overall tax burden for profits distributed as dividends would become 45.4 per cent. As regards dividends from unlisted companies, only 35 per cent of dividends that do not exceed so called normal yield of an investment would be taxed as capital income. 100 per cent of dividends above the normal yield would be taxed as capital income. The normal yield would correspond to the interest rate of mediumterm state loans after company tax (working group calculations are made with 3.9 per cent) and the normal yield 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 company dividends, the new rates being about 30.2 per cent for the normal yield and 45.4 for dividends above the normal yield.
Value added tax and consumption tax
The working group proposes shift of focus of taxation towards consumption tax by increasing the general tax rate to 25 per cent, the tax rate of food and restaurant services to 15 per cent and the tax rate of subsidized products to 11 per cent. In the view of the working group, the long term aim is the unification of consumption taxation. As a first step, the reduced rate for food and restaurant services could be abolished. The group determines the target of increasing the consumption tax burden on activities harmful to health and the environment.
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 are to be introduced during the term of the next government.
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