After several years of negative growth, commerce is now seeing a gentle upturn, which is expected to continue moderately over the next few years. However, the development of commerce and consumer services is hampered by the large double tax wedge, which considerably increases the price of services and erodes purchasing power. To ensure continued positive development in the sector, efforts to reduce the tax wedge must continue in the latter part of the present Government’s term of office.

Retail turnover volume* grew by nearly two per cent last year, thanks in part to extremely low inflation rates and an increase in the number of people employed. The Finnish Commerce Federation forecasts that growth will continue at a slightly slower pace, amounting to some 1.5 per cent, since the positive trend in purchasing power will be slowed down by the inflation rate increasing faster than nominal wages. However, thanks to the improving employment figures and the Government’s income tax concessions, purchasing power will continue to improve. Next year’s retail growth depends largely on employment, since the purchasing power of households will not grow without tax concessions.

As for wholesale trade, construction and the wholesale of consumables helped the sector return to the growth track last year. The Finnish Commerce Federation expects growth to continue at approximately three per cent this year and two per cent next year.

“Although commerce will continue on a growth track, it will not take off. During the early part of its term, the Government has made good decisions to boost growth and employment in commerce, including facilitated land-use planning, income tax concessions and deregulation of opening hours. It must continue to make bold decisions during the rest of its term. The Government must secure consumers’ purchasing power,” says Jaana Kurjenoja, Chief Economist of the Finnish Commerce Federation.

Employment in commerce on the increase again

The development of employment has been mixed in commerce. In the retail sector, the number of wage earners began to increase again after two slow years, but the number of entrepreneurs declined. In the wholesale sector, employment grew at a brisk rate of 11 per cent.

“Many factors have influenced employment in commerce. The deregulation of opening hours increased the number of both wage earners and working hours, especially in the daily consumer goods trade, but on the other hand, some of the grocery shops and kiosks run by individual entrepreneurs have closed down. Several specialty businesses, with large staffs, have done well in the price and cost competition and have recruited more people,” Kurjenoja explains.

The growth in specialty goods trade and construction are other factors contributing to the steep growth in wholesale employment. The number of entrepreneurs has also increased in the wholesale sector. Moreover, the increased sales of daily consumer goods along with longer opening hours have resulted in a greater need for wage earners in the sector.

According to the Finnish Commerce Federation’s forecast, employment in the wholesale sector may dip this year, despite the number of wage earners increasing. Wholesale employment will continue to grow at a moderate pace of two per cent.

Double tax wedge a strain on services

The purchase of all consumer services—from grocery sales to mobile games—is strained by a double tax wedge**. Because of this tax wedge, the overall cost of labour paid by employers will remain high, while purchasing power remains low.

“When consumers work to pay for their consumption, not only do they pay income taxes but also the taxes and charges included in service prices. Their employers, in turn, pay the total cost of the employees’ labour input needed to purchase a service. The double tax wedge seizes the bulk, 70—80 per cent, of the cost of the labour input, and the service provider gets what little is left.

Since the double tax wedge raises the price of services performed and taxed in Finland, consumers avoid the wedge, for example, by making purchases in international online stores or by travelling to Estonia to buy services. The low purchasing power and large tax wedge may make Finland an unattractive place to develop new consumer services and concepts, also for reasons other than costs.

“The double tax wedge that hampers services must be alleviated so that the service sector can develop and provide employment. Income taxation plays a key role in this, since it accounts for the best part of the wedge. Further concessions must be made to income taxation, but not at the expense of the other components of the wedge, such as VAT,” Kurjenoja emphasises.

The threshold for VAT registration must be raised

Decreasing labour taxation could improve the purchasing power of consumers and consequently support employment in the service sector. To support solo entrepreneurship, VAT taxation also needs to be reformed.

International online stores are allowed to sell EUR 35,000 worth of goods in Finland before they are required to pay VAT in the country. Finnish companies, on the other hand, are liable to pay VAT on turnover in excess of EUR 10,000.

“Raising the threshold for VAT taxable turnover to EUR 35,000 would help solo entrepreneurs truly sustain themselves by their own work, in addition to treating Finnish and international companies equally,” Kurjenoja points out.

As for domestic competition, raising the threshold to EUR 35,000 would not disrupt the market, since pension contributions, taxes and other expenses would keep the net income of solo entrepreneurs too low for any price competition advantage to emerge. The Finnish Commerce Federation believes that easing the conditions for solo entrepreneurship would nevertheless help integrate people into the job market. Raising the threshold for VAT taxable turnover would, for example, help immigrants and young people set up service businesses from barbershops and kiosks to IT support services and bicycle repair shops.

The Finnish Commerce Federation also believes that VAT should be paid on imports irrespective of the product price in order to put domestic sales and sales from outside the EU VAT area on an equal footing. At present, many companies based outside the EU VAT area that sell cosmetics, small electronics, natural foods and supplements, books and magazines receive an unfair competitive advantage over Finnish companies, if they import shipments under EUR 22, which are exempt of VAT.

Further information:

Jaana Kurjenoja, Chief Economist, Finnish Commerce Federation, tel. +358 (0)40 820 5378, jaana.kurjenoja(at)kauppa.fi

* Turnover volume is the value of turnover adjusted for price fluctuations.

** The difference between the overall cost of the consumer’s labour input needed to purchase a service and the net income of the service provider. The double tax wedge includes all income-related direct and indirect taxes and parafiscal charges, as well as VAT.

The Finnish Commerce Federation represents commerce—the largest sector of economic life. Commerce employs around 300,000 people in Finland. The Federation has around 7,000 member companies and represents both retail and wholesale commerce in industry policy and labour market lobbying. www.kauppa.fi