Tax on financial activities

The Government of Sweden recently received a proposal for a tax on financial activities (Swedish Government Official Reports 2016:76). The Committee was assigned to propose a new tax on financial activities based on an argued tax advantage for businesses supplying financial services since these services are VAT exempt.

The proposed tax on financial activities is designed as an additional tax (of 15 %) on salary costs and will not be income tax deductible.

Who is being taxed? Anyone supplying financial and insurance services exempt from VAT in accordance with Chapter 3, Paragraphs 9 and 10 of the Swedish VAT Act (to be compared with the exemptions laid down in Article 135(a) to (g) of the VAT Directive). Under some circumstances, purchasing services from a country outside Sweden may be subject to the tax.

The proposed tax is neither limited in respect to the actual supplier of the VAT exempted financial or insurance services, nor to a specific legal form. In addition, there is no turnover (or acquisition) threshold of supplied financial and insurance services that excludes the proposed taxation. The only subject excluded from taxation is the Swedish Central Bank.

What is being taxed? The taxable amount consists of the taxable persons total labour cost during the fiscal year concerned. If the taxable person is able to prove that a certain portion of the total labour costs is not related to the VAT exempted services, these can be excluded from the taxable amount.

When, and how, is taxation due? The tax on financial activities is levied at a rate of 15 % of the total labour cost and will be paid as a preliminary tax within the income tax procedure.

According to the proposal, the tax will apply as from January 1, 2018.

Firstly, the reasoning behind the proposal is highly questionable. The proposed tax is based on the assumption that the financial sector is being undertaxed due to the exemption from VAT. This assumption does not take into account that input VAT being not deductible. Hence, input VAT is in fact a cost for the financial services sector.

Moreover, apart from the debatable reason for proposed taxation, several difficult problems arise. The main issues concerns who will be covered by the tax and how the taxable basis should be determined. Even now it is difficult to establish whether or not a certain service is VAT liable. In addition, the proposed tax results in challenging assessments for mixed businesses of whether or not an employee actually works with the financial activities. For mixed businesses a division on “reasonable grounds” is to be determined. Consequently, a tax on financial activities will increase the demarcation issues and require additional documentation. Also, it results in a bigger administrative burden.

Additionally, a great number of businesses outside the traditional financial sector will fall within the proposed taxation on financial activities as there are no limitations with regards to the taxable subjects (except for the Swedish Central Bank) as well as a lack of a turnover threshold. Hence, the tax is applicable on all companies supplying VAT exempted financial and/or insurance services, i.e. companies providing intra group loans or selling shares. Consequently, any company supplying even only one financial or insurance service will fall within the scope of the proposed taxation.

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