OECD Wishes to Establish Uniform Rules for Corporate Income Tax System

OECD (Organisation for Economic Co-operation and Development) has proposed for public discussion the so-called minimum tax proposal according to which uniforms rules for corporate income tax would be applied across the world in the future. The Chamber of Commerce does not support OECD’s proposal and sent a respective address to the OECD.

According to the proposal made by the OECD, a uniform corporate income tax would be applicable across the world with a minimum level in place. This means that companies in the countries that would accede the income tax obligation convention should, either on the group level or in all units, pay income tax on a certain minimum level. If the general requirements have not been met or verified, the countries of the location of the parent company would be able to request payment of tax on the revenue of the affiliates. Furthermore, if a parent company pays to the affiliate (or affiliate to the parent) in, for example, Estonia for something (interest, licence, dividend etc.), the payment would not be considered under the efficient tax rate in Estonia according to the definition of the source country, and the taxes would be withheld in the source country. The duty is planned for companies with a turnover of at least €750 million.

Although in Estonia a very small number of companies would meet the €750 million criterion, the initiative proposed by the OECD has the following risks for Estonian entrepreneurs:

• Establishing conditions for the taxation of even one company would mean significant increase of the administrative burden;
• Other member states where the parent company is located, may start taxing profit earned in Estonia on the group level;
• It is not certain that the described system is able to consider investing of the profit of the reporting year during the following reporting year, which would mean that the reinvested profit could be taxed in another member state;
• The European Commission may have a real need to start enforcing the OECD agreement in the European Union with a directive, because not all EU members are members of the OECD;
• It is generally questionable, what would happen to the current tax agreement (prevention of double taxation), how to tax the profit of business units that are not part of the OCED or companies of the members of the OECD who refuse to sign the convention, how to ensure fair and uniform implementation of the system and how to prevent double taxation;
• It is generally questionable, if the current income tax system of Estonia could be preserved in this case because keeping two different accounts at the same time would be much more expensive than the current one. There would be a silent pressure to transfer to the general income tax system.

In its address, the Chamber highlighted for the OECD that we do not consider interfering in honest competition and sovereign economic policy to be the right thing to do. Establishing a minimum corporate income tax system would in any case bring disproportionate administrative burden to Estonia. We consider it reasonable to focus on measures against companies that illegally avoid taxes and not to deteriorate the business environment for law-abiding companies.