17. Mar 2022
Increasing tax burden

Highest ever tax revenue despite the pandemic

Taxes paid by Faroese households and businesses in 2020 totalled almost DKK 9.3 billion. In the same period, the Faroese GDP was at DKK 21.2 billion. This leaves for a tax burden of 43.8%. In the period 1998 to 2020, excluding 2003 and 2009, every year has seen an increase in tax revenue. Despite the pandemic, 2020 also saw an increase in tax revenue, with a particular increase in taxes on production and imports.

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Tax burden at its highest in ten years

As the way in which countries measure their tax burden varies, international comparisons ought to be made with caution. Nonetheless, the most common method for comparative analysis of tax burdens is the tax-to-GDP ratio, which compares the total tax revenues and duty with the GDP at market price.

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Throughout the period 1998 to 2020, the tax burden has fluctuated between 39% and 46% of the GDP. In 2020, the tax burden was at 43.8%, the highest figure since 2011. The rising tax burden is caused by tax revenue increasing by 3%, while the GDP has decreased by 2.8%.

Income tax and property tax the main components

Income tax and property tax make up the majority of the total tax revenue, accounting for just under 58%. Income tax mainly includes personal income tax and corporation tax. Property tax includes road tax, among other components. Production tax and import tax account for the second largest component of the total tax revenue, representing 29%. For production tax and import tax, value added tax (VAT) makes up the majority of all taxable income. Value added tax is payable on most all goods and services. Compulsory actual social contributions, which include the Labour Market Supplemental Pension Fund, unemployment insurance, as well as contributions to the parental benefits fund and the national health insurance system, make up 13% of the total tax revenue. Capital tax accounts for less than 1%, made up mostly of inheritance duty.

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Adjusted tax burden lower than standard tax burden

There are various ways of measuring the tax burden, as demonstrated in the grey box below. The adjusted tax burden represents tax percentage of the gross national disposable income. For every year in the period 1998 to 2000, the gross national disposable income is higher than the GDP. Hence the adjusted tax burden is lower than the standard tax burden. In 2020, the adjusted tax burden amounted to 40.6%, which is just over 3% lower than the standard tax burden. The difference between the standard tax burden and the adjusted tax burden was just over 6% at the turn of the century. Current transfers from abroad make up a relatively larger part of the gross national disposable income in the 1990s compared to today.

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The modified tax burden represents the gross disposable public income as a percentage of the gross national disposable income. In contrast to standard tax burden and adjusted tax burden, the gross national disposable income decreased in 2020. This is due to the gross public income decreasing more than the gross national disposable income.

The factor tax level, which is the tax percentage of the gross domestic factor income, follows the trend of the tax burden, although the factor tax level is higher.

Tax burden in the Faroe Islands relatively high

Compared with other Nordic countries, the tax burden in the Faroe Islands is among the highest. Denmark has the highest tax burden at just over 47%. In all Nordic countries, the tax burden is above 30%. In Finland, Norway and Iceland, the tax burden is below 40%, while the tax burden in Sweden is just over 40%. Thus, the Faroe Islands have the second highest tax burden in the Nordic region.

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International comparisons ought to be made with some caution as countries have different systems of taxation, for instance, the ways in which transfers are taxed, and how tax deductions are allocated.