November 23rd, 2012

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In the late phases of the national budget negotiations, the government did an abrupt about-face on its tax proposals, ensuring that businesses will avoid three of the most annoying tax initiatives that parliament has invented in recent years. In short, the revenue that would be generated by the fat tax, the sugar tax and the increased tax on Danes working abroad simply does not match the burden they would impose on businesses and the economy.

However, the elimination of these taxes is being financed by an increase in the income tax for everybody, and therefore we now find ourselves in an extremely ironic situation, in which we are actually willing to applaud the government for raising income taxes. And frankly, it feels slightly strange!

As the voice of international business in Denmark, AmCham is particularly focused on the framework conditions relating to Denmark’s competitiveness and ability to attract investments. We have repeatedly demonstrated that Denmark’s high taxes and the high cost of doing business – combined with low productivity growth – have contributed significantly to an investment gap, which Denmark has built up over the past decade. And our members were astonished by the recent efforts to isolate Denmark from the outside world, namely the removal of the tax exemption for Danish expatriate employees. The proposal in itself has already had significant implications for international companies, where many have simply stopped posting Danish employees abroad.

Additionally, the fat tax was an example of a purely political agreement being made in a broader context of a tax reform without any real understanding as to the impact of implementation – or its effectiveness in the fight against obesity. As it turned out, they have yet to find out how to do either. Unfortunately, this didn’t stop the government from implementing the new law earlier this year and creating a massive administrative burden for all companies in the Danish food chain.

In general, the government and parliament have made a habit of changing the tax rules – at least once a year. And it seems as if they’re oblivious to the fact that a change of the rules in itself often has a negative impact on business – particulary companies investing from abroad.

Essentially, companies that are considering investing in Denmark must have confidence that the rules they base their investment on are not going to change dramatically. If they perceive a risk of significant rule changes, the company is less likely to choose Denmark as an investment location. As a small market in a high cost environment, Denmark should actually be offering companies a guarantee that the conditions currently in place will not change during the next five or ten years – and if they do, the new rules will be grandfathered in for existing companies. This would in turn give companies truly stable investment conditions and enhance Denmark’s reputation as a country ‘Open’ for business.

With the fat tax now being eliminated (and the sugar tax and the expat tax not being introduced), the government is left with a public deficit that will be covered by a tax increase – with our support. In other words; an elegant dance with two steps back – and then one forward.

On the other hand, if the government had taken one step back directly (to the tax increase), we would certainly have complained about the negative impact on Danish competitiveness. So, with this little dance, the government has assured the support of the international business community for a tax increase, which we know is harmful to businesses and the economy. And, as mentioned, this feels … slightly strange.

Looking forward, we anticipate there will again be new rules: maybe on personal taxes, maybe corporate taxes – and maybe removing some of the errors from the past. The multimedia tax was short-lived, and now the fat tax and perhaps next time the rules on carrying losses forward could be changed back to the way they were just a year ago.

A two-step can be great fun, but if you keep going two steps back for every one step forward, you’ll be dancing your way off the dancefloor, and you’ll have a hard time finding a partner for the next dance.

The author is the executive director of AmCham Denmark