Source: Viðskiptablaðið
Iceland’s new government plans to impose additional taxes on the country’s most successful economic sectors—fishing and tourism—which could backfire in the current global turbulence and unfinished trade war.
Though there is no conflict in Icelandic society about whether companies should not pay fair taxes and fees on their operations, the country’s export sectors are currently facing major challenges.
This is primarily due to uncertainty about the consequences of U.S. President Donald Trump’s misguided tariff policy for international trade and how the foreseeable downturn in the U.S. economy will shape demand for Icelandic exports.
Arion Bank had expected export-led economic growth this year, but the upheavals of recent weeks have led the bank to reassess its forecast. It now expects economic growth of just over one percent, driven by private consumption.
This clearly shows how rapidly the export sectors have deteriorated recently. Landsbankinn’s economic forecast points out that Trump’s tariff policy and the downturn in the U.S. economy could reduce the number of domestic tourists coming to Iceland.
That would be a major blow to the tourism industry, as the U.S. is our most important trading partner in terms of tourism.
In addition, the real exchange rate of the Icelandic króna is at its highest levels, partly due to large wage increases in recent years. A high real exchange rate undermines the competitiveness of Icelandic exports.
It is clear that Icelandic export sectors are being targeted from many directions. In this light, it is shocking to watch the actions of the Kristrún Frostadóttir government in two of its most basic export sectors—tourism and the fishing industry.
The government has announced that fishing fees will be doubled. The increase is exceptionally poorly implemented and is likely to undermine the value creation of the Icelandic fishing industry and its competitiveness.
The mere linking to the price of fish in Norway is particularly ill-conceived. The exchange rate of the Norwegian krona is about 20% higher than the Icelandic krona in U.S. dollars. It should be clear to everyone what effect this implementation has on the competitive position of the Icelandic fishing industry compared to the Norwegian one.
The government has also announced a special tax on the tourism industry. The richness of ideas in this regard is noteworthy, but as was discussed in Morgunblaðið the other day, a buffet of taxes and fees on the tourism industry was offered in a memorandum that was compiled for the government formation negotiations for the current government parties in December.
This unsightly buffet included an overnight stay tax on all accommodation, more extensive parking fees, entrance fees to national parks, environmental taxes and overnight stay taxes on cruise ships, an environmental tax on air passengers, an alternative airport fee and an environmental tax on environmentally unfriendly rental cars.
It is clear that such a buffet is directly conducive to undermining the competitiveness of the tourism industry.
There is no conflict in Icelandic society about whether companies should not pay fair taxes and fees on their activities. Everyone agrees on this. But taxation must be in such a way that it does not reduce value creation and incentives for investment.
The implementation of the increase in fishing fees does not meet these objectives and politicians should let that thinking guide them when it comes to formulating tax policy for the tourism industry. But the fact of the matter is that neither the fishing industry nor the tourism industry needs increased tax collection in these uncertain times that we are currently experiencing.
On the contrary, it is important that the government looks after basic industries and value creation. The uncertainty ahead is great and politicians must realize that in such times it is not right to tax the nation’s foreign exchange earnings.
Source: Viðskiptablaðið (in Icelandic)