Wage tax on a rapidly changing Swedish financial sector (2016)
In the first place, there is a substantial difference between a VAT on financial services sup-plied to customers residing in Sweden – the real VAT solution – and a wage tax on financial production in Sweden. This may well reduce the under-taxation of private consumers’ use of financial services as a real VAT solution would bring. But it will at the same time com-pound an existing over-taxation of businesses’ purchases. They already pay a hidden VAT from banks’ purchase costs (software, equipment, premises) which they cannot deduct against their outgoing VAT. This will in particular hurt smaller Swedish firms relying on Swedish banks for finance while we expect much less impact for international Swedish firms already tapping international capital markets. Furthermore, it will reduce Swedish banks’ ability to compete from Swedish soil against competitors from other countries.
Hence, business investment as well as external competiveness will suffer for small Swedish businesses and internationally oriented Swedish banks.
An introduction of such a tax in the coming years also fails to take into consideration the major transformation that digital technologies are bringing to the financial sector globally. It has allowed more-and-more of the value chain from customer contact to back-offices functions to be carried out by large IT-systems. This has and will continuously lead to ra-tionalisation of retail networks and back-office functions towards IT-based solutions. At the same time, new players are entering, not the least technology providers, the so-called FinTech industry.
This has profound implications for the functioning of wage tax. First, the digitalisation has dramatically reduced the importance of physical proximity to the customers: Payment ser-vices such as internet banking and back-office functions can easily be placed in countries such as the Baltics or India – as indeed Swedish banks have already done. In other words, the financial sector has moved rapidly over the last decades, from a largely retail network model with most “production” being produced locally close to the customer by a traditional bank, to models where services can be provided by many players and located not necessarily in Sweden.
To sum it up, a wage tax on financial services providers operating from Sweden will today see much more “leakage” of activities to firms supplying from other countries and accelerated shifts of back-office and IT-systems within Swedish banks to locations outside Sweden compared to a similar tax just 5 or 10 years ago.
This has consequences for both the fiscal revenues from the tax and bank employment. First, the tax intake from the wage tax will not only be eroded by reduced demand from customers but also by more outsourcing of activities. We expect that the net tax income from the wage tax may be in the area of 5,6-6,3 billion SEK after taking into account these two effects. Second, we expect that the wage tax may lead to a reduction in employment in the order of 3.700-7.200 persons in the Swedish banking sector by 2020, and possible as much as 16.000 jobs in the total financial sector.
In addition, it will also undermine the very strong position that Sweden and Stockholm has in providing risk capital and spearheading the FinTech opportunities. In 2014, Sweden had the largest number of venture capital investments as a share of GDP among all European OECD countries, with a leading position in the Nordics when it comes to small firm IPOs and start-ups. In the end, despite the size of the country, Sweden covers 18 percent of the total FinTech investments in EU.