Iceland tax: Government announces tax proposals

The Iceland government announced detailed tax proposals on 18 November 2009 that would make considerable changes to direct and indirect taxes and taxes on goods and services. This announcement comes on the heels of the Budget Bill for 2010, which was presented to the Parliament in October. While the budget bill proposed tax increases, it did not include any specifics. The new proposals fill in these gaps (the indirect taxes proposals have been presented to the Parliament, but those on direct taxes have not).

The changes to direct taxes would be as follows:
- Personal taxation would change dramatically with the introduction of a three-tiered system of taxation of individual income other than investment income. Individuals receiving income below ISK 200,000 would pay income tax at a rate of 24.1%; those earning income between ISK 200,000 and ISK 650,000 would be subject to a 27% rate; and individuals receiving income over ISK 650,000 would be subject to a 33% rate. In addition, a municipal tax would apply, which in 2009 varied between 11.24% and 13.03%, with an average of 12.97%;
- The tax on individual investment income would increase from 15% to 18%, with an exemption for the first ISK 100,000; and
- A net worth tax would be introduced for individuals with net wealth of more than ISK 90 million (ISK 120 million for couples). The rate would be 1.25% on the net wealth exceeding the limit.

Indirect taxes would change as follows:
- VAT would levied at three, rather than two, rates: 7%, 14% and 25%. The 7% rate would apply to foodstuffs, milk products, household heating, music and media. The 14% rate would apply to restaurants, sweets, biscuits, cakes and beverages other than alcohol. Other goods would be taxed at 25%, which is an increase of 0.5%. The changes to the VAT rules are expected to take place in two phases: on 1 January 2010 and on 1 March 2010.
- Tax on vehicles and oil would be increased, a special carbon fee would be introduced and a temporary (three year) tax on electricity is proposed, with special refunds for greenhouses and homes in colder areas.
- Alcoholic beverages would be subject to a 10% tax in 2010 and taxation on tobacco would increase.

The government intends to continue to work on further (i.e. corporate level) tax changes in 2010.