Study Finds 22% Of Corporate Tax Is Lost To Tax Evasion

Iceland’s treasury receives about 22% less of the estimated corporate tax than it should each year because of tax evasion. This percentage is the second highest in the Organisation for Economic Co-operation and Development (OECD), reports RÚV.

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The former Director of Internal Revenue says there is a significant lack of measures to reduce tax evasion in Iceland.

According to a newly published scientific article by economists Thomas R. Tørsløv, Ludvig S. Wier, and Gabriel Zucman, they estimate Icelandic companies transfer approximately one-fifth of their profits out of the country every year.

15 billion of corporate tax is lost

In 2019, approximately 75 billion ISK in revenue was evaded tax. Therefore, the state’s lost tax revenue was about 15 billion ISK.

Experts estimate almost 40% of the profits of international companies around the world are transferred to tax havens, and that evasion reduces tax revenues in the world by an average of 10 percent. According to the article, Germany is the only country where the lost income from corporate tax is proportionally higher than in Iceland, 28%.

Calculating tax evasion

Þórólf Matthíasson, professor of economics at the University of Iceland, explains that economists look at the profit ratio of domestic and foreign companies in tax havens. They found that the profit ratio is many times higher in foreign companies in tax shelters than in domestic companies.

“Those companies in a tax shelter that primarily work for the local people, bake their bread, rent them housing and so on, generate just as much income per króna invested in them as similar companies in countries where corporate income tax is higher. Foreign companies in tax havens that sell ‘expert services’ or rent out the use of exclusive licenses make proportionally many times the profit,” he says.

“That’s how they find out that Icelandic companies have moved 20% of their profits out of the country and that if things were handled ‘correctly’, the income from corporate income tax in Iceland should be about 22% higher than it actually is.” says Þórólf.