Ladies and gentlemen.
The Icelandic economy has done very well in recent years. Business earnings have improved and the standard of living of the country as a whole is one of the best in the world. Business has increasingly taken advantage of the favourable business environment created by the Government and in cooperation with the labour movement produced outstanding achievements. New industries have sprung up and a large number of companies has entered into business ventures abroad with notable success.
These past 10-15 years have been an exciting time for the business sector. Government interference in business has been reduced and trade has been increasingly liberalised, such as for instance by our entry into the European Economic Area, the cut in taxes and the privatisation of banks, all of which have created room for bold entrepreneurship.
And the results have been evident. All international comparisons of business competitivity place Iceland amongst the leading nations in the world. Only yesterday, a comparative study of 21 European countries by the European Private Equity and Venture Capital Association places Iceland second after the UK as having the most favourable investment climate.
The keynote headline of this annual meeting of the Chamber of Commerce, “Iceland, best in the world?” is only a reasonable response to the advances made in recent years and the successes achieved by Icelanders and the Icelandic economy. The achievements of this small nation in the middle of the North Atlantic has attracted attention world-wide. This attention has generated a discussion, sometimes critical, but far more often positive. Our international reputation is important to us, but we should not let it control our course. By our actions and deeds, we must strive to create a sound record of our actions and a good image of ourselves.
Our country possesses ideal conditions in many respects for the creation of an ideal society, one of the world’s best, and we should let nothing stop us from attaining such a goal. Iceland’s small population is sometimes a disadvantage, but it also has its advantages. Our social cohesion is a significant benefit. Iceland is a good place to raise children and we are well connected with our natural environment. Our country is pristine and clean and we are blessed with generous natural resources.
Freedom has been the guiding light of the changes that have taken place in our society in recent years and that has led to the best standard of living that the nation has ever enjoyed. Freedom generates new opportunities for venturing into numerous new areas. It creates possibilities for transforming ideas and ideals into reality. But freedom comes with a great deal of responsibility. It matters a great deal how freedom is applied and how it is used.
What does it mean to strive for being the best in the world? It should not be measured by economic standards alone. We also wish to be the best by other measures. We wish to be a society that creates conditions where everyone can make use of her/his talents, enjoy an education, a standard of welfare and security.
Icelandic businessmen have always been conscious of their social responsibility. This should continue to be the goal of our companies as well as that of government. It is laudable that there are so many companies that are aware of other aspects of their environment than the bottom line of the annual accounts. I believe that Iceland also wants to be at the forefront by measures other than financial. The business community must continue to be an active participant in creating an attractive social community.
Our human resource is the most valuable asset we possess. Contemporary business leaders understand well the need for well-educated workers that can avail themselves of a continuous career education. The agreements reached with labour unions regarding the continuous job training of unskilled workers are important in this respect. The initiative of the business community as well as of individual companies in education is widely visible. The new agreement between the Government and the University of Iceland marks the conviction of the Government that scientific research will render significant dividends for the future of our economy and society as a whole. Emphasis has been placed on increasing choices in higher education, an effort that the business community has supported with enthusiasm. Finally, let me mention the need for creating the opportunities for people of foreign origin that are settling here. These people must have an opportunity for real assimilation, and businesses should strive to help them become active participants in society.
The high participation of women in the labour market has been a characteristic of our society for many years. Women make up a majority of university students. Young people entering into the labour market should have equal opportunity, regardless of gender. The Government amended the Childbirth Leave Act several years ago, providing for an independent right for fathers to take childbirth leave. This amendment has had a profound social impact.
But there are still tasks ahead in reducing the pay difference between men and women. Research shows that this difference is still considerable, and it is important that government and businesses work together to eradicate it. There is doubtless no one sitting in this room who would say to his or her daughter that she should be paid less than her male classmates because she is a woman. Still, this remains a reality and we can change it. The human resource of women is no less valuable than that of men.
That should be a part of Iceland’s reputation and image.
The most competitive tax environment
A number of profound and positive improvements have been made to our tax system in recent years. One example thereof is the cut in the corporate income tax. In 2001, when the tax was 30 per cent, Treasury revenue from the tax yielded only 9 billion. Last year, an 18 per cent tax yielded close to 34 billion. In 2001, the corporate income tax comprised only 5 per cent of Treasury revenue, whereas last year it was up to 10 per cent. There are those who would maintain that this is evidence of a tax increase, not a tax cut. The use of such concepts is often an effort to deceive the public.
These figures show without a doubt that cutting the corporate income tax was the right decision. If we had listened to the pessimists in the Althingi and outside it, that the cut would reduce revenue, both the Treasury and the business sector would be worse off. The fact is that revenue from this tax source, the corporate income tax, does more than pay for the entire education system of the country. Low taxes thus form the cornerstone of our welfare state after all.
This also shows that in order for tax revenue to be stable, a high tax rate is not the most advantageous choice. It is more important to have a broad tax base.
Our positive experience from tax changes in recent years strengthens my resolve in going still further in this direction. If we do so, we will get more results in establishing strong companies that generate large tax revenue. We should not enter into competition with tax havens for ill-begotten funds. Iceland should strive to possess one of the most competitive tax environments in the world and preferably stay ahead of our competitor nations in improving of our tax system. If we are successful in attracting capital we will create a stronger foundation for public finances and thus ensure that we can run a strong welfare system.
So what are the tasks ahead? What is it that we must do to improve our tax environment? The best way to answer this question is to look at the countries that are ahead of us in this respect and learn from them.
International financial activity in Iceland
I think it is relevant to make a few observations on the report of a committee on international financial activity that was published earlier this winter. The proposals of the committee have been under further consideration by the Government. It has now been decided to implement some of these proposals, whereas others are under preparation.
Let me first mention several points that relate to the interaction of the authorities with the business community:
Emphasis has been placed on the reduction of bureaucracy and the cost of the public regulatory regime. We have already taken a number of important steps in this direction and others are under preparation under the auspices of the action plan named “A simpler Iceland”. Complicated and ill-understood regulations create unneeded costs and deter the competitive agility of business. Clear and fair rules of play, on the other hand, contribute to a better standard of living for all and make it easier for both the central government and local governments to perform their tasks.
In direct continuation hereof let me also mention that we will open a website in a few weeks, Island.is. This website should facilitate the access of business as well as the general public to the Government and its main information sources.
The Government has also decided to further ensure the secure telecommunications link between Iceland and other countries by undertaking preparations for a new undersea cable. The existence of a secure telecommunications connection is a prerequisite for foreign companies that contemplate the establishment of a venture in a new country. This applies no less to efficient and frequent air and sea communications.
Second, there are issues that relate to further strengthening of the financial market:
It has been decided to adopt the European Union Directive on pension systems, and the legislative proposal of the Minister of Finance has already been presented to the Althingi. The adoption of the Directive is important for making it possible to establish international pension funds that comply with Icelandic laws and regulations. The idea is to make use of the positive image enjoyed by the Icelandic pension system abroad because of its strong funding base and the synergy of the common insurance features of the funds as well as individual accounts in the funds. The Icelandic pension system can undoubtedly be marketed abroad and thereby meet the interest of leaders in international companies in multinational pension funds that operate within the legal framework of the EU.
Legislation is being drafted by the Minister of Commerce for amending laws on investment funds. The amendment is to the effect that such funds be authorised to lend financial assets out of their portfolio under certain conditions. Such an amendment is expected to be the first step in creating an active market in lending portfolio assets that in turn is seen as a necessary precondition for an international market in financial assets.
The above legislative proposal also includes provisions whereby investment funds be authorised to operate under special private limited companies owned by the operating entity of a financial institution. The Ministry of Commerce is also exploring the possibility of reviewing provisions on private equity funds and whether they should be authorised to operate under a separate private limited company.
Let me now turn to the third part of this topic which I believe is no less interesting, the tax issues. There are a number of interesting ideas under consideration in this area, particularly those that would improve the competitive position of Icelandic companies still further vis-à-vis companies in neighbouring countries.
Let me first mention an issue that many consider a priority, i.e. the tax treatment of capital gains from the sale of company shares. According to Icelandic tax law, income tax must be paid on such capital gains, in contrast to dividends. If the sales proceeds are reinvested within a certain period, the tax payment can be postponed until at the time of a subsequent sale, and so on. Recently, a number of taxpayers have resorted to the measure of establishing holding companies in countries where such a tax treatment is not at hand, for example in the Netherlands, for the sole purpose of tax avoidance. Such a tax treatment is not to be found in Denmark, Norway, Sweden and many other countries, and in general it seems to be on the wane. I believe it time to amend our legislation and exempt such gains from tax on the same basis as is done in our neighbouring countries, subject to conditions comparable to those existing there. This would not lead to a loss of income for the Treasury. On the contrary, the opposite would probably happen, namely that business transactions will be repatriated.
Another issue pertains to the taxation of dividends paid from Iceland to countries in the European Economic Area. Such taxation has been subject to growing criticism since it discriminates against such taxpayers in comparison to the taxation of dividends here at home. The Minister of Finance has drafted legislation that would abolish such taxation in a manner comparable with what prevails in our neighbouring countries, for example Norway, Sweden and Ireland.
I have already commented on the positive impact of the cut in the corporate income tax in recent years. When we cut the tax in 2001 there were hardly any countries with a tax rate below 20 per cent. Today, there are several countries with a lower rate. The average corporate income tax rate in 86 countries has declined over the past 15 years from 38 per cent to 27 per cent. If we wish to continue being at the forefront, we must follow this development closely and be prepared to take further steps.
A number of other issues are under deliberation, partly in consultation with the Association of Banks and Investment Funds. I expect that these discussions will lead to an early result. The main issue in my view is that we have a clear idea as to where we wish to go. It goes without saying that we wish to make Icelandic companies and the Icelandic economy as competitive as possible and thus contribute to an improved standard of living in the country.
Ladies and gentlemen.
We introduced the capital income tax on individuals in 1997. Such a tax did not exist before, and interest income was tax-free up to that time. Other capital income was taxed at the same rate as wage income, which led to the fact that the creation of such income was scant. Sales profits were not realised, dividends were low etc. The new tax is estimated to yield 19 billion krónur to the Treasury in the 2007 fiscal budget.
It is often claimed that the capital income tax is unfair in view of the fact that the personal income tax is much higher. When the tax was adopted, the possibility was certainly considered to levy the tax through a complicated inflation-accounting formula of some kind and align the capital income tax rate to the rate of the personal income tax. Instead, a simple method was adopted, and the capital income tax rate was set as about half of the average PAYE personal income tax rate at that time. This was because the capital income tax is a gross tax imposed in part on inflationary increments that do not constitute real income. The tax is also imposed without taking account of justifiable deductions, such as interest payments against interest income, depreciation and maintenance against rent, losses against sales profits etc. Another reason in favour of a fairly low tax rate was to encourage savings. Those who choose to invest and save always have the option to spend their money on consumption and thus avoid the capital income tax.
We were fortunate at that time to adopt a simple and very effective capital income tax that yields substantial revenue to the Treasury today. It would be folly to slaughter such a golden goose, which could happen if we started fiddling with such a fickle tax base that could easily move to another tax jurisdiction. There are some who are unable to understand that 10 per cent of a large sum is far greater than 18 per cent of nothing.
The adoption of the capital income tax and the cut in the corporate income tax has increased Treasury revenue by 4.5 per cent of GDP. It has enabled us to cut other taxes, such as the personal income tax. If we succeed in establishing a still stronger financial sector, it will create further revenue for the Treasury and provide more high-income jobs. I do not share the opinion of some that it would be best to discourage such activity and let it leave the country in order to create more income equality.
There are many issues in the area of taxation that we must consider. If we wish to have a competitive tax system, we can in summary state that this is best done by keeping it simple and effective. Such a system is best suited to perform its role as a source of revenue for the Treasury. I am therefore of the opinion that small and cumbersome taxes that yield little revenue should over time be abolished.
Ladies and gentlemen.
The image of Iceland
Finally, let me say a few words about the main theme of this meeting – the image of Iceland.
The year of 2006 was a turbulent one but at the same time it taught us some lessons. We learned how important an international reputation and image is for a small country. I especially wish to thank the Chamber of Commerce for its initiative in producing the Mishkin report, as well as its authors, Mr. Tryggvi Þór Herbertsson and Mr. Mishkin himself. The report did much to explain the facts of the Icelandic economy to the world.
The business community took the initiative to produce this report. My contribution as Minister for Foreign Affairs at that time was to provide access to the services of the Foreign Service in distributing and publicising the report. I also delivered an address at a meeting in New York where the report was introduced. This project is a good example of successful cooperation between business and government.
When the Chamber of Commerce asked the Government to cooperate in formulating a policy for creating an image for Iceland, we welcomed the request. I am pleased with the progress of this project so far and believe that we have taken positive steps in preparing the project of presenting Iceland’s image abroad.
This is a long-term task and we must view with an open mind how we can achieve greater success. We can not be satisfied with being in 19th place, as was mentioned by Mr. Simon Anholt, the last amongst the Nordic countries. We know that we have all that is needed to be ranked amongst the foremost countries of the world. Although there are many that at present are diligently working on the improvement of Iceland’s image, this work is insufficiently coordinated and therefore does not produce the necessary result. I believe that we must cooperate more closely on this project. This must be a joint effort, both between public entities as well as the private sector. A joint and coordinated effort is most likely to deliver results.
I intend to appoint a working group, a sort of task force, a small group of representatives from government and business to review our work on Iceland’s image and how we can achieve more. We must be open to new ideas and means and set a goal for ourselves to place Iceland at the forefront, both in image and actual fact.
Ladies and gentlemen.
There has been much discussion on the issue of income distribution in Iceland in comparison with other countries. Statistics Iceland has now published a report on a coordinated measurement of the standard of living in the countries of the European Union as well as Iceland, Norway and Switzerland. The report shows clearly that claims by some that income inequality in Iceland is increasing have little substance.
The conclusions of the report show without a shadow of doubt that Iceland is doing very well in comparison with other countries as regards the distribution of income. Only three nations have a lower Gini coefficient in 2004 – and thereby greater income equality – than Iceland, i.e. Sweden, Denmark and Slovenia. The comparison is even more in Iceland’s favour when one looks at the income group below the poverty line, where only Sweden had a lower percentage of the population below the line. The survey is based on personal disposable incomes, i.e. income after tax. Incomes include income from capital but exclude capital gains from the sale of stocks.
We should view these results with satisfaction, since they definitely are in agreement with what most people would have assumed. We have done much in recent years to improve our standard of living. The tax treatment of businesses and individuals play an important role in this respect, as I have already observed.
It must be our common goal to continue on this course and achieve still greater results. There are those who wish to change course, even people who are prominent in the political debate. We will debate these issues in the Althingi and out in society, not here at the annual meeting of the Chamber of Commerce. But the business community must remember that it carries its burden of responsibility.
We should continue our tax policy and exert an effort in improving Iceland’s image abroad in order to make us more competitive and thereby ensure that Iceland will be at the global forefront. The best in the world!