The Swedish National Audit Office (Riksrevisionen) says in a new report that use of the investment savings account (Investeringssparkonto, ISK) has caused SEK42bn (€4bn) in lost tax revenues, and has recommended that the government advise Parliament about the impact of the regime.
The ISK regime was introduced in 2012 to make it easier for individuals to save and invest in equities. The success of the regime has seen some 2.2 million ISK accounts opened. The regime has made direct ownership of equities easier, among other reasons because it makes it easier for taxpayers to complete their annual tax returns. Saving and investing in funds has not been as directly affected, because of pre-existing rules for declaring gains and losses on fund shares, the Swedish NAO said.
However, the Office warned that “some aspects of equity investments have become more complicated.”
“This concerns certain new issues and IPOs, as well as when companies distribute shares in subsidiaries. Additionally, the introduction of ISK has meant that there are now two parallel systems for taxing directly owned financial instruments. Savers who do not want to pay more tax than necessary must evaluate whether ISK is from a taxation point of view a beneficial form of savings or not.”
Ingvar Mattson, auditor general, said: “The introduction of ISK has led to a more complex tax system. One should not underestimate the difficulties that it can mean for individual savers.”
Tax is due on assets in the ISK account regardless whether those asset have increased or decreased in value. This is what make use of the regime a risk, compared to other ways, where tax is paid on gains and losses can be offset.
The Office has calculated that the tax levied on equity assets in ISK was “low” over 2012-17 . The estimate is that tax revenues were down SEK23bn over the period. Additionally, capital gains generated over the period that were not realised before 2018 are set to lead to future tax revenues being lost, equivalent to some SEK19bn.
Mattson explained that these significant sums could be explained by the strength of equity markets over the period. If the markets had not developed as strongly, then the estimated gap in tax revenues would have been different, he said.
The Swedish National Audit Office has recommended that the government advise Parliament about the fiscal impact of the ISK regime, as well as consider the possibility of considering how to address the issues flagged up around new issues, IPOs and ownership of equity in subsidiaries. It also recommends making tax returns easier in respect of equities that are taxed in the conventional sense.
Although the report refers mainly to the tax revenue impact of the ISK regime in respect of direct equity holdings, it has been a core focus of the Swedish Investment Fund Association since launch in 2012.
This is because the regime initially did not allow fund providers themselves to offer ISK accounts, which was seen as creating an unlevel playing field between themselves and, for example, banks.
The Swedish government put forward proposals in 2016 to allow fund providers to also offer the accounts, something that was welcomed at the time by the Association (http://www.fondbolagen.se/sv/Aktuellt/Pressmeddelanden/2016/Antligen-ISK-for-fondbolag/)
This proposed changes to the regime were also seen as important because fund flow statistics and household savings data pointed to rapid growth in use of the ISK by Swedes keen to save in a tax efficient manner.
Proposals to adjust the rate of tax applied to assets held in the wrapper have also been floated in the past – reflecting concerns that its popularity was having an adverse impact on the fiscal neutrality of the regime – something that the Association has warned about, because of the impact any such change could have on flows to funds, where the objective of such flows is to contribute to long term savings.