Main government parties planning sharp rise in VAT

Vanhanen says 25 per cent tax possible in 2011

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Examining policies put forward by the main government parties, the Centre Party and the National coalition Party, a key contemporary message might be: "Enjoy your 22 per cent value-added tax rate while you can, because a couple years from now it will be 25 per cent".
      Centre Party chairman, Prime Minister Matti Vanhanen said at the summer meeting of the Centre Party’s parliamentary group held in Hämeenlinna on Monday that “tightening measures” to balance the economy must be initiated during the present electoral term. One measure would be a general increase in VAT.
      Vanhanen said that Finland will “probably” have to raise its VAT rate by three percentage points to 25 per cent. The time for the hike could be 2011, he said.
      The increase would be a part of a larger package, but the Prime Minister would not discuss it in any greater detail.
     
National Coalition Party leader, Minister of Finance Jyrki Katainen took up the issue in Turku in connection with the summer meeting of his party’s parliamentary group.
      “Sensible deliberation”, is how he described the discussions. “We have not held any kinds of discussions on the matter in the government yet”, Katainen said to Helsingin Sanomat.
      He would not say if Finnish VAT should be 25 per cent, as it is in Sweden.
      “It could be that the rise will be about that much. I can’t say what the schedule is and how much VAT will be raised, but indirect taxes will be used in the future to bring in more tax revenue than before.”
      Ben Zyskowicz, the chairman of the National Coalition Party’s parliamentary group, speculated that Vanhanen probably meant that the VAT rate would be raised by one percentage point next year, and by more over a period of a few years.
      Each percentage point of VAT brings the state about EUR 500 million a year.
     
The idea of higher VAT is not to the liking of Finnish business. Juhani Pekkala, managing director of the Federation of Finnish Commerce, says that his view of the proposal is “very critical”.
      “It is the wrong way to develop taxation. We can see that industry is constantly moving out of the country. It is unnecessary to start punishing domestic business more.”
      Pekkala noted that raising the VAT rate push consumers to avoid the tax by buying more from online retailers based in countries with lower tax rates.
     
While it is not applauding the idea of a higher VAT rate, the Confederation of Finnish Industry (EK) feels that such a move would be a lesser evil than a rise in income taxes would be.
      “If choices have to be made between what is taxed, it would be more sensible to tax consumption than work”, says EK tax expert Virpi Pasanen.
     
Juhani Pekkala is sure that a hike in VAT would be fully reflected in prices.
      This means that a sofa now costing EUR 795 would cost EUR 814 after the increase.
      However, reductions in VAT have generally not been fully passed on to the consumer. For instance, the decrease in the VAT rate for hairdressers and other small businesses from 22 per cent to eight per cent did not lead to a corresponding decrease in prices for those services.
      It remains to be seen if the upcoming cut in VAT on food from 17 per cent to 12 per cent in the autumn will lead to lower grocery prices.
     
Raising VAT to 25 per cent would mean that Finland would join the ranks of EU countries with the highest VAT rate, along with Sweden, Denmark, and Hungary.


Previously in HS International Edition:
  Vanhanen agrees in principle on reduction in restaurant VAT (19.8.2009)
  Minister of Finance suggests compromise over cutting VAT on food (18.8.2009)
  Study: Finnish food would be relatively expensive even without VAT (14.8.2009)

Helsingin Sanomat