The member states of the European Community (EC) and the European Free Trade Association (EFTA) have a special relationship based on geographic proximity, a shared history, common values and—as many see it—a shared destiny.1,2 They are also each other’s most important trading partners (Charts 1 and 2). The EC countries account for over 50 percent of the EFTA countries’ exports and more than 60 percent of their imports. Indeed, the EFTA countries trade as extensively with the EC countries as the EC countries trade among themselves. On the other hand, the EFTA countries by themselves do not constitute a cohesive area. Intra-EFTA trade is—with the exceptions of trade between Switzerland and Austria and between Finland, Norway, and Sweden—insignificant relative to the trade of individual EFTA countries with the EC.
This Selected Issues paper focuses on the European Monetary Union and the monetary policy framework in Iceland. It concludes that in terms of an exchange rate regime, the two most realistic options for Iceland are to continue with the existing arrangement or adopt a unilateral peg to the euro. However, it is argued that both options entail the need for enhancing the independence of the central bank, which will require reforming the Central Bank of Iceland Act. The paper also discusses a Scandinavian forecasting model for inflation in Iceland.
The issue of economic and political integration has been on the Western European agenda since the end of World War II (Siegler, 1961). The first step toward forming the European Communities (EC) was taken in 1951, when Belgium, France, Germany, Italy, Luxembourg, and the Netherlands formed the European Coal and Steel Community (ECSC) with a supranational administrative body, the High Authority.6 In 1955, following the failure of plans to form a European Defense Community and a European Political Union, the same six countries agreed in principle to form a common market, which envisaged the free movement of goods, services, labor, and capital—the “four freedoms.” The founding document of the European Economic Community (EEC)—the EEC Treaty, signed in March 1957—embodied a vision for broadly based economic integration going well beyond simple cooperation on trade issues.
A number of institutional and legal issues arise as a result of efforts toward intensified EC-EFTA cooperation. There is a need for increased mutual recognition in civil law, particularly with regard to commercial judgments, and the institutional changes that may be required as part of the creation of the EES. Other relevant issues include corporate law and industrial and intellectual property.
This paper discusses key findings of the Detailed Assessment of the Securities Clearance and Settlement Systems for Denmark. The assessment recommends that securities settlement systems should have a well-founded, clear, and transparent legal basis in the relevant jurisdiction. Confirmation of trades between market participants should occur as soon as possible after trade execution, but no later than trade date (T+0). Where confirmation of trades by indirect market participants is required, it should occur as soon as possible after trade execution, preferably on T+0, but no later than T+1.
The Icelandic government has launched a review of the tax system, with a view to improving its income redistribution, growth orientation, and efficiency features, as well as increasing its revenue mobilization potential. It aims at minimizing detrimental effects on employment and growth, and at removing inconsistencies with international practices. The tax measures will boost the revenue potential in line with the government’s objectives while substantially increasing income redistribution. The Icelandic Corporate Index Tax would benefit from adopting financial accounting as the basis to determine taxable income.
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. The narrow base and wide gap between the very high 25.5 percent main VAT rate and lower rate of 7 percent distort economic behavior and encourage tax arbitrage, evasion and lobbying. The efficiency of the Icelandic VAT is thus currently well below the European and OECD averages. To address this situation, the government plans in the near term to broaden the base by eliminating exemptions, raising the lower rate, and reducing the top rate. In the medium term, the government targets a single-rate system. To offset the potentially inflationary effects of VAT reform and reduce price distortions, the government is considering repealing the commodity tax and reviewing the trade regime for agriculture. It may also seek to increase social benefits for low-income households most affected by the VAT increases. These measures are all in accord with recommendations made by two previous IMF missions in 2010 and 2011. This mission reiterates its previous recommendations that Iceland should in the near term: (1) eliminate exemptions at least for tourism, transport, sports and culture; (2) limit VAT refunds to local government to services that could be outsourced; (3) double the lower rate to 14 percent; (4) reduce the top rate as revenue permits, depending on base broadening; and (5) in the longer term, move to a single VAT rate of about 21 percent. In addition, this report makes the following major recommendations: • Consider at least doubling the VAT threshold to ISK 2,000,000 (about USD 17,850 or EUR 12,900). A higher threshold will ease administration, allowing limited RSK resources to be focused on the large taxpayers who generate most VAT revenue. • Fully tax all sales and leasing of commercial buildings, as well as first sales of new residential buildings. While materials and construction activities are subject to VAT, sale of buildings has been exempt. This has created pressure for special refund schemes for builders to recoup their input VAT. Taxing commercial buildings and rent will remove this necessity and prevent cascading, while taxing first residential sales will broaden the VAT base to include housing consumption. • Eliminate special VAT refund schemes for buses, and domestic boats and aircraft, as well as CO2 tax refunds for rental car imports. These schemes have been encouraged by the exemption of passenger transport, and by the anomalous taxation of car rental services at the top rate. Taxing transportation will remove the need for these accommodations and level the playing field for car rental companies. • Repeal the commodity tax on building products, appliances and electronics. This will help offset the one-off inflationary effects of VAT reform and remove price distortions on these goods, which having neither inelastic demand nor negative externalities do not meet the criteria for special excise taxation. • If the sugar tax portion of the commodity tax is retained, conduct a study to ensure that 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.
International Monetary Fund. Monetary and Capital Markets Department
This Technical Note reviews crisis management, bank resolution, and financial sector safety nets in Norway. Arrangements for crisis management, bank and group resolution, and the financial sector safety nets are well developed and tested in Norway. Roles, responsibilities, accountabilities, and information-sharing arrangements among the relevant bodies are generally well defined and functioning. The current legal framework provides substantial powers and flexibility to deal with failing or failed banks but needs to be strengthened in several respects. The Financial Supervisory Authority has begun to implement a recovery plan requirement for the largest banks. The authorities also make good use of simulation exercises to enhance crisis preparedness.
This study focused on environmental tax measures, and on allocation, pricing, and taxation of Iceland’s major hydropower and geothermal resources. Measures to secure the tax base for the corporate income tax (CIT) are proposed. Taxation of the financial sector can be improved by a number of measures. The measures that increase fiscal levies on energy-intensive industries should be avoided. The proposals in this paper aim at efficiency and equity in the tax system rather than revenue growth.
This paper presents an overview of the impact of the EC’s Internal Market on the EFTA countries. It starts by examining the history of EC-EFTA relations; the institutional and legal changes that closer cooperation may require; and the general implications of the Internal Market Program for EFTA countries. This is followed by an exploration of specific issues relating to the goods trade, transport services, labor mobility, financial services and capital flows. Subsequent chapters focus on the potential impact of the EC’s proposed monetary unification on EFTA countries and the implications of the EC’s efforts in the area of tax harmonization.