Viewing cable 09REYKJAVIK202, GOVERNMENT RECONSIDERS AMOUNT OF TAX FOR ENERGY USE

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FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 4215
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
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C O N F I D E N T I A L REYKJAVIK 000202 
 
SIPDIS 
 
TREASURY FOR MYERS AND NORTON 
NSC FOR HOVENIER 
COMMERCE FOR DERSTINE 
 
E.O. 12958: DECL: 11/10/2019 
TAGS: ECON EFIN IC PGOV PREL
SUBJECT: GOVERNMENT RECONSIDERS AMOUNT OF TAX FOR ENERGY USE 
 
REF: A. REYKJAVIK 191 
 ¶B. REYKJAVIK 176 
 
Classified By: CDA SAM WATSON FOR REASONS 1.4 (B) AND (D) 
 
¶1. (C) SUMMARY: Recent actions by the government of Iceland 
(GOI), including a proposal to introduce a significant energy 
tax in the 2010 budget bill (reftel B), have raised concerns 
about the current environment for foreign investors. 
Implementing significant tax increases ex-post-facto, for 
example, could disadvantage American companies currently 
operating in Iceland and significantly hinder Iceland's 
ability to attract needed foreign direct investment (FDI). 
Over the past few weeks, the Charge d'Affaires (CDA) has 
conveyed such concerns to various high-ranking members of the 
GOI including: representatives in the offices of the Prime 
Minister and President as well as the Ministers of Economic 
Affairs, Environment, Finance, Foreign Affairs and External 
Trade, and Industry. GOI officials appear to understand the 
message and assured CDA that Iceland wants to take steps 
necessary to attract FDI while also taking into consideration 
the nation's fiscal challenges. Now the GOI has, in fact, 
walked back the proposed energy tax and is engaging industry 
leaders in the process. END SUMMARY. 
 
The Aluminum Industry 
--------------------- 
¶2. (C) The aluminum industry has been one of the more vocal 
opponents of several recent GOI actions and expressed concern 
that the GOI wants to kick it out of the country. In recent 
months, government decisions have resulted in the cessation 
of plans to build a smelter in Bakki and a delay in 
construction of a new smelter in Helguvik. Plans to expand a 
third smelter in Straumsvik are also being called into 
question. In addition, the first draft of the 2010 budget 
bill proposed implementing an energy tax of one ISK per kWh 
(0.8 cents) for electricity usage. This proposed tax has 
generated anger among many businesses, but particularly the 
aluminum industry because it chose to locate in Iceland for 
the low power costs and it accounts for about 80% of the 
country's electricity consumption. Executives from the two 
American-owned aluminum smelters, Alcoa and Century Aluminum, 
expressed concern to CDA that such action could violate their 
existing investment agreements and significantly reduce the 
companies' profitability. They estimate the tax at one ISK 
per kWh would create an additional expense of 13.2 billion 
ISK ($106 million) per year. Equally troubling, said 
aluminum representatives, is that they first learned about 
the proposed tax in the newspaper. Communication with the 
government, they complained, has been virtually non-existent 
since the new government (with the pro-environment 
anti-aluminum Left Greens as a partner) took control earlier 
this year. 
 
¶3. (C) GOI officials across the board, including the Minister 
of Environment Svandis Svavarsdottir, have told CDA that they 
do not want the aluminum companies to leave Iceland. All 
recognize the importance of this sector as one of the 
country's largest employers and largest export industries. 
(Note: the aluminum industry accounts for almost 42 percent 
of exported goods and 29 percent of overall export revenues 
for Iceland. End note.) Their size and importance is one 
reason the aluminum industry should not be excluded from 
rebuilding the country, said Minister of Industry Katrin 
Juliusdottir. Minister of Finance, Steingrimur Sigfusson, 
also acknowledged that it would be healthy for some aluminum 
projects to go forward as they would create additional jobs 
and revenue for the state. (Note: the Minister of Finance 
was referring to continuation of projects already under way - 
construction of a new smelter for U.S. company Century 
Aluminum and expansion of the Swiss-Canadian Alcan smelter. 
End note.) 
 
Justification for Tax Increase 
------------------------------ 
¶4. (C) The Minister of Economic Affairs, Gylfi Magnusson, 
told CDA that increasing tax revenue is essential to close 
the fiscal gap and stimulate the economy. He noted that the 
tax base has eroded in the last year, especially in the 
corporate sector. Aluminum companies argue that the proposed 
energy tax of one ISK per kWh (0.8 cents) targets the 
industry unfairly and will force the businesses to cut back 
on operations. (Note: this tax would apply to all consumers 
of electricity, not just the aluminum industry. Aluminum 
companies, however, would shoulder the majority of the tax 
burden since they utilize about 80% of the nation's 
electricity. End note.) Minister of Industry Juliusdottir, 
however, asserted that the GOI will not allow taxes to 
suffocate industries. She and other Ministers told CDA that 
the one ISK per kWh (0.8 cents) mentioned in the first draft 
of the budget had merely been an example, but was too high. 
As of November 9, the GOI is proposing a tax of 12 aurar (0.1 
cents) per kWh. (Note: Reykjavik households pay about seven 
to eight ISK (about six cents) per kWh for electricity, and 
the aluminum companies pay undisclosed lower amounts. Energy 
prices for aluminum firms differ based on agreements signed 
with the government. End note.) Finance Minister Sigfusson 
reiterated that all must share the burden of rebuilding the 
economy, and while aluminum companies may not be happy about 
it the GOI hopes the final solution will be considered fair. 
Foreign Minister Skarphedinsson assured CDA that he was 
working to broker a compromise that would enable the firms to 
continue to operate in Iceland and not close off potential 
future investment into the country. 
 
Future Direction 
---------------- 
¶5. (C) The GOI recognizes the importance of creating a more 
comprehensive, standardized environment to attract FDI. 
Minister of Industry Juliusdottir told CDA that she intends 
to create a clearer, more general framework for FDI rather 
than negotiating with companies on a case-by-case basis. 
Investors should know what to expect, she said, regarding the 
legal environment, financial environment and taxation. 
Simultaneously, Minister of Finance Sigfusson is working on 
creating a long-term vision for the country's future 
development. He acknowledged the need to harmonize 
incentives and the duration of investment agreements, and is 
considering introducing possible deductions for new 
investment and incentives for start-up periods. Last week, 
Sigfusson introduced two bills to parliament providing 
incentives for Icelandic high tech and research and 
development companies. 
 
Comment 
------- 
¶6. (C) GOI officials understand the importance of FDI in 
rebuilding the nation's economy. Though the government has 
been slow to implement changes to create an attractive 
investment climate, it recognizes that steps need to be taken 
to attract, or keep, investment. Plans to create a clearer, 
comprehensive framework for FDI and to introduce incentives 
are two examples. In addition, as CDA stressed in meetings 
with the Ministers, it is important that key industry players 
be included in process. The government appears to have 
accepted the notion as several aluminum representatives, who 
earlier approached the Embassy in frustration after being 
kept out of the discussions, recently thanked the Embassy for 
getting them a seat at the table and nudging the government 
away from the initial tax proposal. The reduction of the 
proposed energy tax from one ISK (0.8 cents) to 12 aurar (0.1 
cents) resulted from consultative talks between the GOI and 
the Association of Icelandic Employers, of which the aluminum 
companies are the largest members. While current plans and 
proposals are still subject to change, the ideas under 
consideration and initiation of dialogue are steps in the 
right direction for U.S. firms. End comment. 
WATSON