Finland further reforms VAT and insurance premium tax rates

Following recent increases in value-added tax (VAT) rates, the Finnish government has decided to reform the Finnish VAT rates as well as the insurance premium tax (IPT) rate. The first of the reforms will take place within two months. The Government's proposal for increasing the general VAT and IPT rates to 25.5 % was adopted on 28 June 2024 and the new rates will become effective from 1 September 2024. (For background, see EY Global Tax Alert, Finland's VAT increase could make VAT rate the second highest in the EU, dated 8 May 2024.)

In accordance with the transitional rules, the new VAT rate will be applied when the liability to remit VAT occurs on or after 1 September 2024. Transactions for which the liability to remit VAT has occurred prior to the effective change date would be subject to the 24% VAT rate.

The Government's proposal was subject to substantial criticism, especially with regard to the tight schedule as the change is considered to pose significant challenges, particularly for the information systems used by businesses. According to public comments on the proposal, for example, not all information systems may currently recognize a VAT rate that includes decimals. Additionally, company systems may need to be ready to use the two VAT rates in parallel, as the old VAT rate may still need to be used for some time if invoicing is delayed or transactions with the old VAT rate would be subject to corrections or discounts in the future.

The Government's planned additional multiple tax-rate changes (see immediately below) will be implemented in several stages, adding further challenges to updating the systems.

• The change for commodities currently taxed at a 10% VAT rate (excluding newspapers and periodicals) that will be moved to the 14% VAT rate is intended to come into effect from 1 January 2025. The Government's proposal for the legislative change is expected to be presented to the Parliament in week 39 (i.e., the week of 23 September 2024), according to the current estimate.

• The Government reportedly intends to separately implement the rate increase for candies and chocolates from the 14% VAT rate to the general (25.5%) VAT rate, later in calendar year 2025. Due to challenges in defining the scope of application, the preparation of the matter may require more time — as of yet, there is no definitive information on enactment of this change.

• The change for menstrual protection products, incontinence pads, and children's diapers, currently taxed at 24% VAT rate and to be moved to the 14% VAT rate, is intended to come into effect from 1 January 2025. The Government's proposal for the legislative change is expected to be presented to the Parliament in week 39, according to the current estimate.

Implications

The changes necessitate that companies review, among other things, contracts and their VAT clauses, price lists, and invoice texts. Regarding the change in the general tax rate, and especially in consumer sales of products subject to the general tax rate where the price can no longer be changed (e.g., in consumer sales where the price has been agreed upon prior to the VAT rate change), profit margins will decrease. Additionally, the verification of purchase invoices must be intensified in connection with the change to ensure that the purchase invoices contain the correct VAT rate and amount. Should the invoice contain an incorrect VAT rate or amount, the invoice would be therefore nondeductible.