Iceland's participation in international actions to prevent tax evasion
For years, the Icelandic authorities have placed emphasis on participating in collaboration aimed at preventing international tax evasion. The objective is to enhance transparency and increase the efficiency of taxation so that all taxpayers will pay the taxes to society that they owe.
TAX Information exchange agreements
The fight against tax fraud cannot be effective without international cooperation, particularly as regards exchange of information. Of material importance is Iceland's participation in the work of the Organisation for Economic Co-operation and Development (OECD), which has played a pivotal role in developing an international standard under which member states pledge to exchange information on a regular basis concerning financial assets and income deriving from such assets. Information is exchanged regularly without explicit request from the countries concerned.
Iceland was one of the 52 countries that signed an agreement to adopt the OECD standard in Berlin on 29 October 2014. In addition to exchanging information in accordance with the standard, signatory nations pledge to take appropriate action to ensure that they can provide the information. The information exchange will begin in 2018. Iceland is a member of the Early Adopters Group, which is committed to begin the exchange programme a year early, in 2017. A total of 96 countries have agreed to commence regular exchange of information in accordance with the standard. Next year, when the tax authorities begin to receive information on the basis of the new OECD standard, the information exchanged could cause the tax authorities to request further data on specified taxable entities on the basis of information exchange agreements or double taxation treaties.
Moreover, Iceland has participated in the joint Nordic campaign on the conclusion of tax information exchange agreements (TIEA) with low-tax jurisdictions, which began in 2006 and is now complete. A total of 44 agreements have been concluded . The above-described tax information exchange agreements cover only the exchange of information upon request, which means that the tax authorities must possess minimum information on taxable entities in order to be able to respond to requests for information. These agreements widen the network of information exchange agreements substantially, both for Iceland and for the other Nordic countries. Before the agreements were concluded, the Icelandic authorities had virtually no means of verifying information on ownership of companies held by Icelanders in low-tax jurisdictions, or on the income reverting to owners from these holdings.
In addition, the authorities have been in favour of enabling public institutions engaged in supervision and investigation of tax matters to obtain data on taxable entities' financial assets in tax havens. Such data have also been offered for sale. In accordance with this, the Directorate of Tax Investigations was promised support for the purchase of data offered to it in 2014, and the fiscal budget supplement for 2015 authorised the purchase of data that the Directorate of Tax Investigations considered likely to be of use both to the Directorate and, as appropriate, to other institutions within the tax system. These data were purchased last year; however, it is in the hands of the institutions concerned to explain how the data were used.
CFC legislation
Rules on controlled foreign corporation (CFC) were incorporated into Icelandic law at the beginning of 2010. This legislation provides the tax authorities with a powerful tool to use in the fight against tax evasion connected to low-tax regions or countries. CFC rules extend to companies, funds, and institutions located in low-tax jurisdictions and owned or directed by Icelandic owners, either individuals or companies. The legislation provides for the metrics to be used to determine which countries or regions are considered low-tax jurisdictions, primarily to include the ratio of corporate income tax to profit. If the ratio is less than two-thirds of the tax rate that would have been levied on the company if it had been domiciled in Iceland for tax purposes, the jurisdiction is considered a low-tax jurisdiction. At present, Iceland's corporate tax rate is 20%, and two-thirds of that amount is therefore 13.3%.
Based on CFC rules, tax treatment is such that, in the case of companies owned by an Icelandic company, the companies' combined profit is taxed according to Icelandic rules, irrespective of whether it has been distributed to owners. Information on ownership must be submitted annually to the Director of Internal Revenue. If the owner is an individual whose tax domicile is in Iceland, payments from the company concerned are taxed as income from commercial activities, which is taxed as regular earned income in the case of sole proprietors. However, the CFC rules do not apply if Iceland has a double taxation treaty or international agreement with the jurisdiction in question. Neither do they apply to companies in EEA countries, EFTA countries, or the Faeroe Islands.
Rules on transfer pricing
New rules on transfer pricing, which took effect in 2014, give the tax authorities another powerful tool to combat tax evasion in general, in connection with either domestic or foreign companies, including companies in low-tax jurisdictions. These rules focus on irregular business practices in connection with pricing between related enterprises, such as parent companies and their subsidiaries. Extensive foreign investment in Iceland is a good example of activities that the tax authorities must examine with a particular eye to transfer pricing.
The BEPS Action Plan – increased international cooperation
In October 2015, the OECD and the leaders of the G20 countries presented their final report on the BEPS (base erosion and profit shifting) Action Plan, which had been in preparation since 2013, with active participation from Iceland. The report contains an action plan aimed at developing effective responses to multinational companies' tax strategies involving reduction or even elimination of tax payments. This can be done by exploiting the gaps between different countries' tax systems, in conjunction with double taxation treaties, to shift companies' profits from high-tax jurisdictions to low-tax jurisdictions. When this is done, the jurisdiction where the profit is actually generated, and which is entitled to levy tax on it, could be deprived of substantial tax revenues.
The BEPS Action Plan covers 15 points defined as key areas that need to be addressed. They centre variously on domestic legislation and/or amendments to the wording of double taxation treaties. This includes but is not limited to tax-related issues such as increased country by country reporting on large companies' transfer pricing, special provisions in double taxation treaties regarding treaty abuse, limitations on interest deductions (thin capitalisation), strengthening of CFC rules, and more explicit provisions in double taxation treaties on who is the beneficial owner of a company.
Since the BEPS report was published, experts from the Ministry of Finance and Economic Affairs have worked on mapping out and orchestrating individual aspects of it, as regards both current legislation and double taxation treaties. It is clear that statutory amendments will be needed in order to satisfy the OECD requirements, and these are expected at the autumn legislative session. The OECD recommendations also call for amendments to double taxation treaties and Iceland's double taxation model. Such amendments are still under development at the OECD, with active participation by Ministry experts in various OECD committees and work groups.