Lunch meeting at the Copenhagen Diplomatic Club. Speech of the Minister for Taxation.
Det talte ord gælder/the spoken word applies
Ladies and Gentlemen,
First of all thank you for inviting me to this lunch meeting today. It is a pleasure for me to participate, and it is an excellent opportunity for me to discuss matters relating to Danish tax policy.
Taxes do matter, and I’m glad to see that it has your interest. When foreigners hear of our top-tax rate of about 63 % applied to ordinary incomes they look at us in shear disbelief. Yet surveys shows that Danes are among the happiest people in the world. How does this go together?
Maybe it’s because Denmark is like the bumblebee. We really shouldn’t work as much as we do, with the high taxes we pay, but still we have a very high employment frequency among both men and women. Some might even expect us to be quite depressed because of our high taxes.
Like the bumblebee we probably shouldn’t be able to fly. Yet Denmark flies and has by most standards a very strong economy. Year after year we have more or less had a trade-surplus, eliminated a very large foreign debt, and are well on the way to eliminate the public debt as well.
I believe that some of the credit for the Danes accepting the high tax level should be given to our very effective and highly digitalised tax billing system. The very high degree of digitalisation makes the system smooth and less time consuming.
I am very pleased that – regardless of our tax level – half a year ago the Economist Intelligence Unit in collaboration with Colombia University in New York, ranked Denmark as the best place in the world to do business - now and for the next five years. So: Taxes do matter, but they are clearly not all that matters with regards to how well an economy creates growth and prosperity.
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I would like to point out some key issues in the Government’s tax policy. There are four issues, I would like to concentrate on:
- The government is firmly committed to the tax-freeze
- Making an extra effort must be worthwhile
- It should be attractive to run a business in Denmark
- International cooperation
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First and foremost: I have a vision, that the Danish tax system shall be efficient, fair and reliable.
When the government came to office back in 2001, taxes in Denmark were very high. At that time politicians were always discussing taxes. Should we reduce interest deductions? Or couldn’t we just modify and change taxation, so that somehow we would all pay just a little bit more, but in a way that we really wouldn’t notice it. We were all so tired of these endless discussions about taxes.
We’ve now successfully had a tax-freeze for more then 2.400 days. The main principle of the tax-freeze is that no tax or duty will be increased. This might not mean a lot to the rest of the world, but it does make a world of difference for the Danish tax policy.
The tax-freeze has helped us to regain the confidence of businesses and taxpayers. We believe that when taxpayers and businesses know what their taxes will be – when buying a house or investing in their business – this in itself helps to promote a dynamic society and enhance personal freedom.
The tax-freeze is the focal point of our tax policy and the government is firmly committed to this principle. By having the tax-freeze we have also introduced discipline in public spending. At the moment, there is an ongoing debate about welfare. Never before, have we spent so many billions on welfare and still the demand - the outcry if you will – for spending even more is growing. The louder the outcry for more spending is, the more I’m convinced, that the tax-freeze most certainly is the perfect answer for Denmark.
So far, I think even most economists will agree with me. The tax-freeze does have a positive effect on public spending and priorities.
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My second point is, that making an extra effort must be worthwhile.
Everyday the challenges facing Danish society – like globalisation and changes in technology and demography – becomes ever more apparent. The demand for labour in both the private and public sector is a great and indeed a growing concern for the government. The government has, therefore, among other things set up a tax commission with the aim of making it more attractive to work.
Sometimes, I get the question, if it is in fact possible for the Danes to work longer hours. And even though some people can not or will not put more hours into work, this is not the predominant picture.
On the contrary, looking at the Western countries Danes are among those who work the fewest hours. In fact it would not call for more than a few extra hours of work each month in order to make a great economic impact. And it is possible to tempt the Danes in a way that will make more people work longer hours. All experience shows that when the marginal tax on income is reduced, most people are prepared to work a little more.
The task of the tax commission is to develop models for how we can ease the tax burden on labour in order to make it more attractive to work. I have promised the tax commission peace to work. Therefore, I will not start speculating exactly on how income tax should be reduced. But I would point to two problems.
The first and most well known is that too many employees pay top-tax. In fact, the latest figures show that more than 4 out of 10 full-time employees, pays around 63 % of their last earned income. It is evident, that this must have an impact on whether they want to work an extra hour or not.
The second problem lies in the opposite end of the income scale. It shows that about 120,000 Danes would gain less than 10 $ a day, if they were to start working instead of being unemployed! When we take into account the possible loss of public benefits if an unemployed starts working the actual gain is very, very low. This is neither right nor fair.
I expect these two issues to be a central part of the work of the tax commission.
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Thirdly, it should be attractive to run a business in Denmark.
To put it simple: It’s useless to try to make it attractive to work harder or longer hours, if nobody’s willing to invest capital and know-how in doing business in Denmark.
First of all a competitive corporate tax is essential. In 1989 we had a corporate tax rate as high as 50 %. This government has decreased the corporate tax rate twice – from 30 % some years ago to 25 % to day. The decrease was, however, to some extend financed by broadening the tax base.
Secondly, we have in the just finished parliamentarian session adopted legislation that makes it easier for Danish companies to recruit highly qualified and skilled labour from abroad and to implement a generational handover.
In addition, we have felt it necessary to defend our tax revenue. We have introduced several measures to avoid the exploitation of the interaction between Danish and foreign tax systems and we have continually made the Danish tax system resistant to international tax planning.
A significant element has been the introduction of a cap on the deductibility of net financing expenses in 2007. This means that financing expenses can now only be deducted if they are related to the operation of the company. Another important element is the so-called EBIT-rule, which means that if the deductible net financial expenses exceed 80 % of the Earnings Before Interests and Taxes, the excess is not deductible, but can be brought forward to deduction in future years. Both measures only apply to large company groups.
The government will also in future take appropriate steps to assure the competitiveness of our corporate tax, and we will react prompt to any international tax planning against the Danish tax system.
I expect one of the coming areas of focus to be taxation of patents. The government has just made a broad agreement with the opposition that negotiations on a system for taxation of patents should be initiated this fall. The aim will be to make it more attractive to place patents in Denmark.
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My fourth point of focus is international cooperation.
Even though the design of the just mentioned anti-abuse measures – just to give one example – were complicated by our international obligations, we do place very much emphasis on international cooperation – in general as well as in tax matters. This goes for both bilateral cooperation and multilateral cooperation through the EU and the OECD.
I expect the future theme of the international cooperation to be agreements on exchange of tax information. Ongoing regional and global integration have created an international financial system virtually without border controls.
To be able to enforce various domestic laws, our countries are today dependent on other countries’ willingness to share information. This is particularly true in the tax area.
Unless an increasing number of countries begin to cooperate in sharing tax information, I expect non-compliance with national tax laws to soon become an urgent global problem. It is therefore essential, that all countries work towards establishing an international financial system based on transparency and effective exchange of information in tax matters.
From Danish side we participate in an OECD project on combating harmful tax practices just as we take active part in a Nordic working group with the aim of concluding tax information exchange arrangements with jurisdictions that have made a commitment to apply the OECD standards on transparency and exchange of information in the tax area.
Denmark has together with the other Nordic countries concluded an agreement on exchange of information in tax matters with Isle of Man and our Nordic group is negotiating with Jersey, Guernsey and some jurisdictions in the Caribbean to conclude similar agreements.
In addition we expect to conclude a large number of tax information exchange arrangements within the next few years. Most jurisdictions contacted by the Nordic countries have reacted positively to concluding such arrangements. I will also like to underline, that in order not to disadvantage the jurisdictions that participate in the global efforts to combat international tax evasion, we will also at some stage consider possible defence measures against un-cooperative jurisdictions.
Cooperation on sharing tax information is also a factor to us when designing new agreements on Double Taxation. All new agreements on Double Taxation must live up to the OECD standards for exchange of information.
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Coming to an end – and looking at the year to come – I would finish by saying that the tax policy will in the coming year be marked by the work and recommendations of the tax commission. The commission has committed itself to delivering its final report on the 2 February 2008. Up till 2 February the tax commission will work on possible models for a comprehensive tax reform of the Danish tax system. A reform that should also underpin the high ambitions of the government on climate and energy.
Subsequently, we enter the phase of political debate on how to design the future tax policy. I hope and believe that we can assemble a broad political majority on a tax reform that will hold many years and that will – among other things – include a significant reduction of taxes on income.
It is the aim of the government to ensure further growth, welfare and prosperity in Denmark and it is my firm conviction that a significant reduction of taxes on income is required to meet these objectives.
I look very much forward to the next parliamentary session and the many exciting tax policy challenges waiting ahead.
Thank you for your attention.