Saturday, July 11, 2009

Paying Taxes is Public in Finland

The Nordic countries have peculiar tax practices – not only do we pay taxes but we do so as a public matter. Every year around October-November the tax administration publishes a publicly available (though pay-per view at 0.36 cents per line) list of taxpayers income and capital gains taxes, for the previous tax year. As the wealth tax was abolished in 2006, wealth no longer is public.

The practice has created a number of publications and services that buy and publish the data, to find out - for instance - your colleague’s or friend’s incomes. One of them is Veropörssi, which publishes the taxable income of all citizens who made more than 10,000€ in taxable income, and even has a text message service for quicker answers.

Newspapers, both broadsheets like Aamulehti and tabloids like Ilta-Sanomat among other media publish similar figures in an easily accessible format to the point that the public broadcasting company YLE has a “tax machine” to look up the top income and capital gains tax earners in each municipality.

My parents' tax returns are public, so are my neighbours', and so would mine if I weren’t a student in 2007 not making more than 10,000€ in taxable income. Gifts and grants are not made public as gift tax is not under the publicly available returns. So students, athletes and artists on scholarships can at times are absent from these publications. Debates are ongoing as to whether they should be made public, and also require pensions contributions, and I rather support making all forms of pay -- from grants to stock-options -- equally part of the public tax information.

Top income tax earners are public figures in Finland as a result of heightened media scrutiny on top income tax earners. The CEOs of Nokia and other major corporations are all well-known not only for their public role in business, but also for their tax returns. The chairman of the board of Nokia and Shell, Jorma Ollilla had 9,8€ million in taxable annual pay in 2007, while the CEO of fashion group Marimekko Mika Ihamuotila had a pay of 5,1€ million. Both are well respected corporate leaders.

Other technology companies, and investment banks are among the other top income tax earners. Surprisingly many new start-ups of the past 10 years are among the top league of capital gains tax payers - raising some suspicions of older wealth having gone offshore. The highest capital gains tax payer was Göran Sundholm, the CEO and founder of Marioff, manufacturer of fire extinguishers, making 81 million in capital gains. He sold a part of the company's shares in 2001 to Nordic Capital, a private equity firm - domiciled in Jersey! The company was sold on from Nordic Capital in 2007. Despite recent tax information exchange treaties between the Nordic countries and the Channel Islands, knowing what information to ask from a Jersey-domiciled fund would be difficult for the tax authorities.

Not many people make a big fuss about how much your neighbour makes, and the cultural transparency goes far beyond taxes in the Nordic countries. Names of residents and companies are always posted outside buildings in post boxes and doorbells. Businesses often have large neon-lighted names attached to the buildings they occupy, partly due to dark winter nights, but also the idea of knowing who is based where – crucial also for tax purposes.

The history of the practice is also interesting, as pointed out by Osmo Soininvaara, a Green MP in Helsinki, in a recent debate. The practice comes from times when income tax was a discretionary issue to be negotiated mainly on the municipal level with local tax authorities. To avoid abuses in such a discretionary system, all tax payments were made public.

Countries still applying discretionary tax payments, such as the UK for its non-doms, or Switzerland for its incoming residents should take a lesson here in transparency in publishing at least all these tax deals so the public could have an informed debate. Same would apply for tax holiday and tax exemptions for companies.

Arguably the worst tax system is an arbitrary one, where direct dealings with tax authorities determine the applicable taxes. Today some consider that taxes in Finland are based on a strict tax code, and the old rationale for combating arbitrary taxation is no longer legitimate. However, arbitrary practices still exist as the tax planning industry is also present in Finland in coming up with ever more industrious schemes to avoid taxes. The way to keep the integrity of a tax system is to keep it public.

There are also critics to the practice, as it’s seen as an infringement of privacy, and others point out special cases such as income from crime tip-offs also appearing on annual income tax records placing whistleblowers at risk. A crime victim-protection scheme does exists, where your tax returns remain hidden where the court has ruled so – mostly applied in cases of personal harassment.

The system produces some distinctive features, such as the role of artists who complain that as finishing works of art take several years, annual returns give a distortionary picture of their incomes as some years are phenomenal, others nearly nil. However such windfall gains, and especially ones in the financial sector, are part of the current economic model and an informed debate on them is rather better than being left in the dark.

These returns also reveal some common tax planning strategies. If you happen to be a major owner of the company your work for, the company (or you yourself as its main shareholder) can decide to pay you a minimum wage of 15,500€, while making most income in capital gains taxed at 28%. In comparison, marginal income tax rates vary between 8.5% to 31.5% to which you need to apply a municipal tax, which in 2008 was on average 18.6%, bringing the top income bracket to about 50.1%.

The publicity of tax returns in Finland has its admirers and its critics, currently a complaint has been filed at the European Court of Justice, based on a Supreme Administrative Court case in Finland, where publications were sued for reselling tax information by text messages to clients, something that needs to be discussed under the freedom of speech debates if it intrudes the privacy of personal surroundings making chats in the café or restaurant rather more public. The effect however is very similar to looking the same information up the following day in a publication.

Also demands are made to for the tax authority to provide the information free of charge on thier website, as is the case in Norway, rather than reselling it to newspapers and third parties. This would be an improvement, as often transparency in the simplest form is the best manner.

Watch this space in October for the annual who is who in tax in Finland.

Matti Kohonen - the author is a Finnish citizen working as a consultant for the Tax Justice Network International Secretariat.


Blogger Physiocrat said...

High taxes in Scandinavia are a good thing. They are apparently well spent and we get a good quality of public environment.

But because these high taxes are levied on wages, the burden falls on the employer and the result is high levels of unemployment. This is concentrated amongst young people and immigrants. In Sweden it is slowly, insidiously and without apparent recognition, wrecking the economy of what was once the most prosperous country on the planet.

The high taxes need to stay but the burden of them needs to shift.

8:20 am  
Anonymous Anonymous said...

So you think selling lists of peoples' incomes in a magazine has merit to it? Government transparency should come by forthrightness with its laws and procedures, not with arbitrarily interfering with peoples' privacy. So what happens when those lists of incomes are floating around in the internet? Could the recent kidnapping of one wealthy Finnish family's daughter be due to the fact that peoples incomes are advertised in magazines year after year. Could those lists of personal data be also used to discriminate? The high taxes in Scandinavia are not so high. People in New York pay more taxes and get far less, especially with medical care.

I, for one, am not happy about having my income and taxation personal data sold in magazines and me given no right to object to it. That's against human rights, EU basic rights, the Finnish constitution and so on.

10:06 am  
Blogger TJN said...

As we all wait for the this year's tax returns in Finland to hit the press... there has been a decision by the Supreme Administrative Court yesterday (24 September 2009), on the issue of the 'Veropörssi' publication of 1.2 million citizens' tax information. It was considered not to be journalism, as the information was in a list and not in any form of an article. So this publication is now banned, along side with the text message service they offered. Not many will miss it, and besides the same information is in a binder at the municipal registry, and the tabloid press can make still discuss the celebrities tax returns.

The practice is thus obviously not unconstitutional (indeed it's in our income tax law that allows this), the idea enjoys public support, and the EC court ruling supports our practice (while not in bulk).

On the kidnapping issue, you don't need to check the public tax returns to know who's wealthy in society, the victim of the June 2009 kidnapping was a daughter of a major industrial family. Good detective work, and law-abiding finns (who reported a box full of money in a car park to the police) are the reasons why the kidnap was solved.

On salary discrimination, surprisingly it works also the other way, as the gender gap and salary gap between your work colleagues is known to you when you have your annual review of your pay, or when you negotiate your pay in a new job. Maybe a reason why we have a lower gender pay gap...

True taxes are not that high in Finland for individuals, it's employer contributions that make the bulk of the social security payments -- and for a good reason, you want such payments to as fixed as possible to keep a stable health care system.

2:06 am  

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