{ "title": "Iceland: Technical Assistance Report-Modernizing the Icelandic VAT", "publication": "IMF Staff Country Reports, September 23, 2014", "sourceUrl": "https://www.imf.org/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354", "canonical": "https://www.imf.org/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354", "overlayPath": "/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/index.md", "summary": "EXECUTIVE SUMMARY Iceland’s government, elected in 2013, is conducting a general review of its tax policy with a view toward making it more efficient and less distortionary.1 To this end, it has targeted VAT reform as a priority to become more reliant on consumption rather than income taxation.", "sections": [ { "heading": "Executive summary and diagnosis", "content": "- Iceland’s government, elected in 2013, is conducting a general review of tax policy to make it more efficient and less distortionary, with VAT reform a priority to shift reliance toward consumption taxation.\n- The Icelandic VAT has a narrow base and a wide gap between the main VAT rate of 25.5 percent and the lower rate of 7 percent, which:\n - Distorts economic behavior.\n - Encourages tax arbitrage, evasion and lobbying.\n - Produces VAT efficiency well below European and OECD averages.\n- Government near-term strategy: broaden the VAT base by eliminating exemptions, raise the lower rate, and reduce the top rate.\n- Government medium-term target: transition to a single-rate VAT system.\n- To offset potentially inflationary effects of VAT reform and reduce price distortions, the government is considering:\n - Repealing the commodity tax.\n - Reviewing the trade regime for agriculture.\n - Increasing social benefits for low-income households most affected by VAT increases.\n- These measures align with recommendations from IMF missions in 2010 and 2011." }, { "heading": "Near-term recommendations reiterated by the mission", "content": "- Eliminate exemptions at least for:\n - Tourism\n - Transport\n - Sports\n - Culture\n- Limit VAT refunds to local government to services that could be outsourced.\n- Double the lower VAT rate to 14 percent.\n- Reduce the top VAT rate as revenue permits, contingent on base broadening.\n- Medium-to-long term: move to a single VAT rate of about 21 percent." }, { "heading": "Major additional recommendations from this report", "content": "- Consider at least doubling the VAT registration threshold to ISK 2,000,000 (about USD 17,850 or EUR 12,900) to:\n - Ease administration.\n - Allow limited RSK resources to focus on large taxpayers who generate most VAT revenue.\n- Fully tax:\n - All sales and leasing of commercial buildings.\n - First sales of new residential buildings.\n - Rationale: while materials and construction activities are subject to VAT, sale of buildings has been exempt, creating pressure for special refund schemes for builders and potential cascading; taxing these sales broadens the VAT base to include housing consumption and removes need for refund schemes.\n- Eliminate special VAT refund schemes for:\n - Buses\n - Domestic boats and aircraft\n - CO2 tax refunds for rental car imports\n - Rationale: these schemes are encouraged by the exemption of passenger transport and the anomalous taxation of car rental services at the top rate; taxing transportation removes the need for these accommodations and levels the playing field for car rental companies.\n- Repeal the commodity tax on building products, appliances and electronics to:\n - Help offset one-off inflationary effects of VAT reform.\n - Remove price distortions on goods that do not have inelastic demand nor negative externalities and therefore do not meet criteria for special excise taxation.\n- If the sugar tax portion of the commodity tax is retained:\n - Conduct a study to ensure the price increase it imposes on sweetened products is sufficient to discourage their consumption.\n - Alternatively, repeal the sugar tax and move sweetened products to the top VAT rate." }, { "heading": "Key quantitative values and targets (as stated)", "content": "- Main VAT rate: 25.5 percent\n- Lower VAT rate: 7 percent\n- Proposed doubled lower rate: 14 percent\n- Longer-term single VAT rate target: about 21 percent\n- Suggested VAT registration threshold: ISK 2,000,000 (about USD 17,850 or EUR 12,900)\n\nInternational Monetary Fund — Iceland: Technical Assistance Report-Modernizing the Icelandic VAT\n\n---\n\n Content in this bundle\n\n- cr14291\n - cr14291 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - cr14291 (PDF){rel=\"external\" type=\"application/pdf\"}" } ], "bullets": [ "[Markdown version](/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/index.md)", "[Structured JSON version](/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/index.json)", "[Bundle manifest](/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/bundle-manifest.json)", "Published: September 23, 2014", "Series: IMF Staff Country Reports", "DOI: https://doi.org/10.5089/9781484391761.002", "Iceland’s government, elected in 2013, is conducting a general review of tax policy to make it more efficient and less distortionary, with VAT reform a priority to shift reliance toward consumption taxation.", "The Icelandic VAT has a narrow base and a wide gap between the main VAT rate of 25.5 percent and the lower rate of 7 percent, which:", "Government near-term strategy: broaden the VAT base by eliminating exemptions, raise the lower rate, and reduce the top rate.", "Government medium-term target: transition to a single-rate VAT system.", "To offset potentially inflationary effects of VAT reform and reduce price distortions, the government is considering:", "These measures align with recommendations from IMF missions in 2010 and 2011.", "Eliminate exemptions at least for:", "Limit VAT refunds to local government to services that could be outsourced.", "Double the lower VAT rate to 14 percent.", "Reduce the top VAT rate as revenue permits, contingent on base broadening.", "Medium-to-long term: move to a single VAT rate of about 21 percent.", "Consider at least doubling the VAT registration threshold to ISK 2,000,000 (about USD 17,850 or EUR 12,900) to:", "Fully tax:", "Eliminate special VAT refund schemes for:", "Repeal the commodity tax on building products, appliances and electronics to:", "If the sugar tax portion of the commodity tax is retained:", "Main VAT rate: 25.5 percent", "Lower VAT rate: 7 percent", "Proposed doubled lower rate: 14 percent", "Longer-term single VAT rate target: about 21 percent", "Suggested VAT registration threshold: ISK 2,000,000 (about USD 17,850 or EUR 12,900)", "**_cr14291**" ], "related": [ { "title": "_cr14291", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14291.pdf", "summary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14291.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14291.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/index.md", "json": "/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/index.json", "bundleManifest": "/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354/bundle-manifest.json" }, "generatedAtUtc": "2026-09-14T12:32:11.521Z" }