Iceland told to withdraw VAT measures

The Icelandic government has been asked to unwind a number of VAT compliance measures by the European Free Trade Association (EFTA). It concluded that the VAT simplification changes provided unfair state aid for local IT sector companies at the expense of companies from other EFTA member states. Iceland has built a large international data processing sector in recent years, and the measures were seen as being effectively harmful taxation.

• An exemption from import VAT on the purchase of data processing equipment for international data processing centres in Iceland
• An exemption from Icelandic VAT for the provision of mixed (exempt mixed with standard VAT rated) services from data processing services to foreign companies and non-taxable residents

EFTA found that some other services which were re-categorised as VAT exempt were acceptable, but the above services were effectively unfair state aid. As a result of the ruling, Iceland will have to recover the unpaid VAT from the exemptions from the affected businesses.