OECD Reviews Economic and Tax System of Finland

April 8, 2010 Taxation in Finland

Finnish National ParliamentThe Organization of Economic Cooperation and Development (OECD) has released its bi-annual Economic Brief of Finland, with an assessment of the country’s economy and tax system and recommendations for changes.

According to the newly published report, Finland was one of the OECD-member nations most effected during the global economic downturn, and, although, it had fared relatively well coming out of the contraction, economic changes must now be made. The proposed changes in the tax system will ensure enhanced tax efficiency and future economic sustainability. Among other recommendations, the OECD suggested a broadening of the tax system, with increases to Value Added Tax (VAT) and a shift of reliance away from corporate and personal taxes towards property taxes. The Government of Finland was also warned that it faces one of the fastest aging populations among all OECD-member nations, and that fiscal precautions would need to be implemented now to avoid the need for sudden tax increases to fund future pension payouts.

On March 31st the Finnish Government approved a supplementary budget featuring several alterations to VAT rates and excise duties. From July 1st the standard VAT rate will rise by 1 percent to 23 percent. Alternatively, the VAT charged on restaurants will be reduced to 13 percent. While the Government estimates the new measures will increase total annual VAT revenue by 4.5 percent, the OECD has stated that this move will ultimately lead to lowered tax efficiency. The report indicated that while the 1 percent increase is a positive move, it should be accompanied by an eventual harmonization of all VAT rates at the higher level, accompanied by target low-income earner compensation.

The report praised the Government of Finland for its efforts to synchronize property taxes, which are largely determined by regional municipalities. At the same time, it was recommended that greater effort be expended to encourage local authorities to lessen reliance on personal income tax revenues, which are detrimental to economic growth, and concentrate on increasing property taxes, that are relatively less harmful to economic expansion.

Photo by Eoghan OLionnain