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Home BUSINESSNo reduction in corporate tax recommended
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Fri, 10 Feb, 2017 12:02:12 AM
FTimes-FNN Report, Feb 9

An expert group appointed by the government did not find any reason to reduce the corporate tax at this moment terming the country´s business taxation system competitive internationally.

The expert group on business taxation set up by the Ministry of Finance submitted its report, which, however, propose changes to the taxation of dividends and earned income, with the intention of increasing the efficacy of taxation, said an official press release.

The expert group’s proposals are aimed at promoting neutral taxation that will not influence taxpayers’ choices. 

This will be an effective way of enhancing productivity and economic growth.

In Finland, limited liability companies and other corporate entities pay 20 per cent corporate income tax on their taxable income. This is less, on average, than in the other Nordic and EU countries.

The expert group considered the corporate income tax rate to be competitive and sees no immediate need to reduce it. 

Finland should nevertheless ensure that the corporate income tax rate remains at an internationally competitive level in future years, too.

The expert group regards the current company taxation model to be justified. The experts do not, for instance, put forward the ACE and CBIT models that have been a focus of international debate and which aim to remove differences in the tax treatment of equity and debt finance. Neither were there found to be justifications for adopting the Estonian model of business taxation.

It also concluded that there is no reason to amend the provisions concerning calculation of the taxable income of businesses.  The experts do not propose the introduction of a tax incentive for research and development or the use of a profit equalisation reserve or investment reserve.

The expert group considers it extremely important that taxation is predictable and stable, and that changes should be introduced only if strong grounds exist for doing so. 

Finland’s current business taxation system is competitive and is not the reason for the subdued growth and low investment seen in recent times, said the group.

The expert group concluded that the taxation of dividends should be reformed, as the demand for a return on investment varies among businesses as a result of the way in which dividends are taxed. This adversely affects the channelling of investment into the most productive assets in the economy.

The system for taxing dividends also has a substantial impact on dividend distribution, creates tension in relation to the taxation of earned income and differentiates too greatly between listed and unlisted companies.

The expert group examined the taxation of earned income from the perspective of skills enhancement and productivity. It proposes changes in the marginal tax on earned income, i.e. in the tax applying to extra income:

The marginal tax rate for earned income would be lowered for those with annual earnings of EUR 82,000–128,000 and in the long run, efforts would be made to reduce marginal tax rates so that they do not exceed 50 per cent at any income level.

This would encourage employees to build up their skills and expertise and thus improve their productivity. This would, in turn, boost economic growth in the longer run, concluded the expert group.

The changes proposed in the taxation of dividends and earned income would narrow the difference between the taxation of capital income and earned income. Even though the proposals would not narrow the difference completely, this would nevertheless reduce the incentive to operate as a limited liability company as opposed to operating as an employee.

The expert group also proposes that the current training deduction be abolished and a separate provision added to the Income Tax Act concerning tax exemption for employer-provided training in employee taxation.

Examining the impact of the expert group’s proposals on general government finances, the changes in the taxation of dividends and earned income would largely balance each other out. The proposals would increase annual tax revenues to the public sector by EUR 44 million, excluding any effects related to taxpayer behaviour.

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