HELSINKI—Finland’s government plans to further cut its corporate tax rate to 20% from 24.5% as of the beginning of 2014 as the nation’s leaders look to kick-start a stagnant economy and address concerns about a lack of competitiveness.
The move could also help Finland keep pace with other Northern European countries taking down the tax burden on corporations.
The move was unveiled as part of a broader structural reform package unveiled Thursday by Prime Minister Jyrki Katainen, who became prime minister in 2011 as Finnish policy makers were looking to maintain the small nation’s economic stability in the face of a growing euro-zone crisis. Finland, which has high wages and has weathered a contraction in core industries, slipped into recession in 2012 but remains one of the healthiest nations in the currency bloc.
Finland is historically reliant on the paper and pulp industries, and the tech sector. In recent years, the nation has sought to diversify its corporate sector by attracting new start-ups, particularly in the software and gaming industries.
“We are launching a significant reform in business taxation,” Mr. Katainen said at a press conference in Helsinki. The move follows similar actions recently taken by Sweden, Denmark and the U.K. to slash corporate taxation.
Finland most recently cut its tax rate in 2012 to 24.5% from 26%. It is currently the only euro-zone member that has the best possible triple-A credit rating with a stable outlook from the three major credit rating agencies. However, its fiscal position and employment outlook are deteriorating as forecasts project only negligible growth this year.
The nation’s six-party coalition government unveiled a structural reform and fiscal adjustment package after concluding its annual fiscal framework review. Sweden has lowered its corporate tax rate to 22% from 25%, while the U.K. is cutting to 21%. In February, Denmark said it will drop the rate to 22% by 2016.
By taking the tax rate down 4.5 percentage points, Finland will see about a 1-billion-euro ($1.29 billion) decline in revenues. The lost income will be recovered, in part, by discontinuing certain subsidies and grants to companies and by tightening taxation of dividends.
The Finnish government’s new economic policy pact also includes budgetary adjustments expected to yield €600 million in economic benefits. Half of the adjustment will come in the form of tax hikes and half in the form of spending cuts, Mr. Katainen said.
Finnish public finances have been in deficit since 2009. Its ratio of public debt relative to the gross domestic product has shot up to an estimated 56.1% in 2013 from 35.2% at the end of 2008.
Because Finland is a member of the European Monetary Union, it is subject to rules setting a ceiling of 60% for the public debt ratio. Finland is one of the few members still conforming to this rule.
When Mr. Katainen’s coalition government came to power two years ago, it set as its goal to halt the rise of Finland’s debt ratio by the end of 2015, when the current parliamentary term in Finland ends. During the past two years the government has agreed on and started to implement spending cuts and tax hikes totalling €5 billion.
Combined with the €600 million fiscal adjustment announcement, the total adjustment should be sufficient to cap the rise in the debt ratio by the original goal of 2015, according to a government official familiar with the matter.
Story courtesy WSJ, Juhana Rossi