## Iceland: Technical Assistance Report-Modernizing the Icelandic VAT

_IMF Staff Country Reports, September 23, 2014_

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**Canonical URL:** [Iceland: Technical Assistance Report-Modernizing the Icelandic VAT](https://www.imf.org/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354)

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## Bibliographic details
- Published: September 23, 2014
- Series: IMF Staff Country Reports
- DOI: https://doi.org/10.5089/9781484391761.002

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### Executive summary and diagnosis
- 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:
  - Distorts economic behavior.
  - Encourages tax arbitrage, evasion and lobbying.
  - Produces VAT efficiency well below European and OECD averages.
- 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:
  - Repealing the commodity tax.
  - Reviewing the trade regime for agriculture.
  - Increasing social benefits for low-income households most affected by VAT increases.
- These measures align with recommendations from IMF missions in 2010 and 2011.

### Near-term recommendations reiterated by the mission
- Eliminate exemptions at least for:
  - Tourism
  - Transport
  - Sports
  - Culture
- 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.

### Major additional recommendations from this report
- Consider at least doubling the VAT registration threshold to ISK 2,000,000 (about USD 17,850 or EUR 12,900) to:
  - Ease administration.
  - Allow limited RSK resources to focus on large taxpayers who generate most VAT revenue.
- Fully tax:
  - All sales and leasing of commercial buildings.
  - First sales of new residential buildings.
  - 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.
- Eliminate special VAT refund schemes for:
  - Buses
  - Domestic boats and aircraft
  - CO2 tax refunds for rental car imports
  - 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.
- Repeal the commodity tax on building products, appliances and electronics to:
  - Help offset one-off inflationary effects of VAT reform.
  - Remove price distortions on goods that do not have inelastic demand nor negative externalities and therefore do not meet criteria for special excise taxation.
- If the sugar tax portion of the commodity tax is retained:
  - Conduct a study to ensure the price increase it imposes on sweetened products is sufficient to discourage their consumption.
  - Alternatively, repeal the sugar tax and move sweetened products to the top VAT rate.

### Key quantitative values and targets (as stated)
- 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)

*International Monetary Fund — Iceland: Technical Assistance Report-Modernizing the Icelandic VAT*

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_Source: https://www.imf.org/en/publications/cr/issues/2016/12/31/iceland-technical-assistance-report-modernizing-the-icelandic-vat-42354_