«Yearbook for Nordic Tax Research 2007 Taxation of Pensions Robert PÂhlsson (ed.) Yearbook for Nordic Tax Research 2007 Taxation of Pensions DJÿF ...»
Yearbook for Nordic Tax Research 2007
Taxation of Pensions
Robert PÂhlsson (ed.)
Yearbook for Nordic
Tax Research 2007
Taxation of Pensions
DJÿF Publishing Copenhagen
Yearbook for Nordic Tax Research 2007
Taxation of Pensions
© 2007 by DJÿF Publishing Copenhagen
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Cover: Morten H¯jmark Print: Narayana Press, Gylling Binding: Dammís Forlagsbogbinderi, Randers Printed in Denmark 2007 ISBN 978-87-574-1774-6 DJÿF Publishing 17, Lyngbyvej P.O.Box 2702 DK-2100 Copenhagen Denmark Phone: +45 39 13 55 00 Fax: +45 39 13 55 55 E-mail: email@example.com www.djoef-forlag.dk Contents Contents Preface
I Taxation of pensions Legal and Economic General Report
Morten Balling and Niels Winther-S¯rensen Danish Economic and Legal National Report
Hanne S¯gaard Hansen, Michael M¯ller and Claus Parum The Finnish Economic and Legal National Report
Jaakko Kiander and Timo R‰bin‰ Icelandic Economic and Legal National Report
Marianna Jonasdottir og Ingvar Rognvaldsson Norwegian Legal and Economic Report
Christian Brinch and Knut Erik Omholt Swedish Legal National Report
Nils Schmid Swedish Economic National Report
Lennart Berg Pensions and the Welfare State
Torben M. Andersen II TAX NEWS 2006 Danish Tax News 2006
Nikolaj Vinther Finnish Tax News 2006
Joakim Fr‰nde Icelandic Tax News 2006
Ingibjˆrg Helga HelgadÛttir 6 CONTENTS Norwegian Tax News 2006
Anne Gro Enger Swedish Tax News 2006
Stefan Olsson III NORDIC TAX DISSERTATIONS 2006 Tax Law & Private Law ñ A Contribution on Interdisciplinary Interaction Between Tax Law and Private Law
Jakob Bundgaard The Concept of Operation Costs in Tax Law ñ in Specific on the Delineation Between Operation Costs and Cost Incurred in Relation to the Establishing and Expansion of an Income Base and on the Delineation Between Operation Costs and Private Expenses
Jane Ferniss VAT Exemptions ñ National Requirements for Vendors
Peter H¯ffner The Tax Treatment of Share-based Incentive Schemes
Ossi Haapaniemi Tax Legislation on Mergers and Demergers
Benn Folkvord Corporate Form and International Taxation of Box Corporations............ 289 Roland Dahlman Titles in the NSFS-series
PrefacePreface Yearbook for Nordic Tax Research 2007 The Nordic Tax Research Council was founded in 1973 by a treaty between Denmark, Finland, Norway and Sweden. In 2003 Iceland joined. Members of the Council ñ 3 from each country ñ are professors in tax law and economy and high ranked government officials. The main purpose of the Council is to strengthen the cooperation between the member states in the field of legal and economic tax research.
Ever since its foundation the Council has based its activities on two main pillars; 1) arranging seminars for the members of the council and for Nordic tax experts and 2) supporting tax research through economic grants. Be welcome to visit the councils homepage at the address: http://www.nsfr.net.
Every year the Council publishes a yearbook which includes a description of the Councilís work as well as papers and reports presented and discussed at the yearly council seminars. All the yearbooks that have been published to date are listed in this edition of the yearbook.
In order to present the work of the council as well as the development of Nordic tax legislation and tax research all contributions to the yearbook are in English.
The 2006 seminar was held in Copenhagen and addressed the topic of Taxation of Pensions. The seminar was very successful and was attended by a considerable number of tax experts from universities and business schools, law firms, private tax consultants, governments and tax administrations. Reports from all the member states were presented analyzing the topic from a legal and economical point of view. A number of lectures were also given by experts. The discussions subsequent to the reports and lectures were very useful and inspiring.
The 2007 seminar will be held 8-9 November in Helsinki, Finland. The topic to be addressed in reports, lectures and by discussion is Taxation of capital and wages ñ towards separated or more integrated personal tax systems?
rhus, Denmark April 2007 Jan Pedersen Professor, dr.jur.
Chair of the Council I Taxation of Pensions Legal and Economic General Report Legal and economic general report
Introduction All over the world, countries are facing increasing fiscal problems related to the financing of pensions. In most countries life expectancy is increasing and birth rates are declining. There is widespread concern about the sustainability of pension systems as populations are ageing. It reflects the global character of the problem that international organizations and institutions have conducted extensive research on the ageing problems. The Nordic countries have a common tradition for taking actively part in international cooperation. This implies that reports on the economic consequences of ageing and pension issues published by the World Bank, OECD and EU institutions have impacted on the design of pension systems in the Nordic area.
It is well known that the Nordic countries belong to the richest countries in the world. Measured by national income per capita, the Nordic countries belong to the group of the ten richest countries. They have also a very high level of taxation and a high minimum level of pensions. The life expectancy in the Nordic countries is very high compared to the world average. According to OECD (2005), the five countries with the longest life expectancy are Japan, Iceland, Norway, Sweden and Switzerland.
In 1994, the World Bank recommended that countries should base their pension systems on a multi-pillar model.1 In practice, the recommendation was interpreted as meaning a Three-Pillar Model. The first pillar should be a state-run PAYG pension. The second pillar should be mandatory membership of a privately managed funded pension scheme, while the third pillar should be an appropriate legal framework for voluntary contributions to funded pensions.
∗ Morten Balling, professor, Aarhus School of Business, firstname.lastname@example.org & Niels WintherS¯rensen, professor, dr.jur., Copenhagen Business School, email@example.com
1. Averting the Old Age Crisis, World Bank and Oxford University Press, New York 1994.
12 MORTEN BALLING AND NIELS WINTHER-SÿRENSENAs explained in the National reports below, all the Nordic countries have chosen a Three-Pillar Model although the relative importance of the individual pillars varies. The broad picture in the Nordic area is that the first pillar is based on a tax-financed public pension. The second pillar is dominated by mandatory occupational pension funds, while the third pillar is based on voluntary pension saving with different kinds of tax incentives.
Pension systems are designed to make it possible for the citizens to redistribute their consumption possibilities over their life time. The systems allow transfer of consumption possibilities from the productive middle years to the period of retirement. Pension systems also make it possible for people to insure against the risk that they should outlive their savings. Governments and Parliaments interfere by legislation in order to create an appropriate framework for the reallocation of consumption possibilities over time and for risk reduction by insurance. An additional public policy objective of great importance in the Nordic area is redistribution of income in favor of low-income groups thus complementing the role of progressive income taxes. Pensions policy can finally aim at economic development and growth since pension arrangements can assist the operation of labor and capital markets and may encourage saving.
There are considerable differences between the OECD countries in the proportion of people above the age of 50 on the labor market. Labor-force participation in 2004 is two out of three for the 50 to 64 year olds in the Nordic countries, in Switzerland, Japan and several English-speaking countries.
The old age participation rates on labor markets are significantly lower in Central and Southern Europe.2 Recognizing the value of a certain degree of uniformity in basic principles and formulations, OECDís Committee on Fiscal Affairs has recommended that the member states follow the most recent version of the OECD Model Tax Convention on Income and on Capital when negotiating new doubletaxation treaties.3 Articles 18, 19 and 21 in the OECD Model deal with crossborder pensions. According to the OECD model art.18 and 21, pension benefits can only be taxed in the state of residence. However, in treaty negotiations Iceland, Norway, Sweden, Finland and Denmark seek to establish a right for the state of source to levy withholding taxes on all pensions, private
2. Whiteford, Peter & Whitehouse, Edward, 2006, Pension Challenges and Pension Reforms in OECD Countries, Oxford Review of Economic Policy, Vol. 22, No.1, 78Articles of the Model Convention with Respect to Taxes on Income and on Capital, As they read on 15. July 2005, OECD, Paris, 2005.
LEGAL AND ECONOMIC GENERAL REPORTas well as public. The Nordic Double-Taxation Treaty gives the right to tax to the state of source.4 In the context of efforts to create an internal market for financial services, The European Commission has published a communication concerning the principles according to which pension contributions and pension payments should be taxed.5 The focus in the communication is primarily on the second pillar pension schemes, but the Commission notes that much of the discussion in the communication applies equally to third pillar pension and life insurance services. The Commission recommends application of the socalled ëEET tax principle.í This principle implies that contributions from employees and employers should be tax exempt, the yield on pension funds likewise while payment of pensions should be taxed at the recipient. More recently, the European Parliament and the EU Council have adopted a Directive on the activities and supervision of institutions involved in occupational retirement arrangements.6 As explained below, Norway, Iceland and Finland have chosen to follow the EET tax principle, while Sweden and Denmark follow the ETT tax principle. The Nordic pension tax systems vary in particular in the treatment of yields on pension portfolios.
The authors of the National reports have been asked to structure their papers according to the following seven headlines:
1) Certainty or uncertainty concerning contributions and benefits?
2) Demographic trends and retirement behavior.
3) Tax treatment and life cycle period.
4) Balance between mandatory and voluntary pension arrangements, level of public pensions and degree of freedom.
5) Issues of fiscal sustainability.
6) International mobility of labor and capital.
7) Implications for capital markets and financial stability.
The remaining part of this general report is organized in a similar way.
4. Convention Between the Nordic Countries for the Avoidance of Double Taxation with Respect to Taxes on Income and on Capital, Effective January 1, 1998. Copenhagen, Helsinki, Oslo, Stockholm, Reykjavik, September 1996.
5. Communication from the European Commission to the Council, the European Parliament and the Economic and Social Committee: The elimination of tax obstacles to the cross-border provision of occupational pensions, COM (2001) 214.
6. Directive 2003/41/EC of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision. According to the OECD Working Party on Private Pensions, recently published OECD Guidelines on funding and benefit security are consistent with Directive 2003/41/EC.
14 MORTEN BALLING AND NIELS WINTHER-SÿRENSEN
1. Certainty or Uncertainty Concerning Contributions and Benefits?
A first distinction must be made between defined-benefit plans (DB-plans) and defined-contribution plans (DC-plans). In a DB-plan, current and future contributions are determined by the benefits that will eventually be provided to the pensioner. The defined pension level may be determined as a given fraction of the wage of the employee during a certain period. So, future benefits are in principle known ex ante with certainty while the contribution level that will be necessary for the funding is unknown.
In a DC-plan, future benefits are determined by the accumulated contributions and the investment performance of the manager of the pension portfolio.
Thus, contributions are in principle known ex ante with certainty, while the future level of benefits is unknown.
Note the use of the words ëin principleí above. There are of course always factors that introduce uncertainties. Future payment patterns depend on the development of prices and wages, on retirement ages and life expectancies. In addition, the projected rates of return on pension portfolios are uncertain.
There is also a political risk in the sense that Parliaments in the future might decide to tighten the pension eligibility criteria or reduce the pension level.