Chamber and Employers to the Prime Minister: Government Should Focus on Economic Growth

Toomas Luman, President of the Estonian Chamber of Commerce and Industry and Toomas Tamsar, Manager of the Estonian Employers’ Confederation sent a letter to the Prime Minister Jüri Ratas highlighting the problems related to the planned pledge income tax. In their opinion, the Government should, instead of establishing the pledge income tax and other new taxes and increasing the general tax burden, focus on supporting economic growth, ensuring stability of the business environment and making the public sector more efficient.

According to the estimates of the Ministry of Finance, approximately 800 million euros in profits have been take out of Estonia masked as loans without paying taxes, due to which there is a plan to solve the problem by taxing loans given inside groups and other similar financing activities with a 20 percent income tax or pledge income tax. “We have consulted on the topic of the pledge income tax with entrepreneurs, tax consultants, Tax and Customs Board as well as the Ministry of Finance. We find that imposing this tax will not solve the problem,” said Luman.

According to him, the tax will instead have a disproportionate damaging effect on the Estonian business environment. “There is a much reasonable alternative available already now, which would solve the problem and the implementation of which is prevented only by the lack of which to deal with the substance of the topic,” he said.

So far, the Tax and Customs Board has been successful in improving the collection of taxes with notices and direct communication based on informing work and risk analysis. As the last solution, it is possible to start tax audit on a specific company, during which section 84 of the Taxation Act allows to re-qualify a loan that is economically unjustified into dividend payments.

Toomas Tamsar said that the inefficiency of the pledge income tax is further proven by the fact that the plan is to collect additional 18 million euros only by the year 2020, although according to the data available for the Tax and Customs Board, the potential tax damage of the companies with the highest tax risk is up to 35 million euros per company. “Thus the tax audit and other measures used by the Tax and Customs Board are much more efficient than an amendment of an act that by default qualifies all loans into distribution of profit if they exceed the paid share capital and loan obligations and are granted for a period that exceeds two years,” said Tammsar.

The business organisations do not understand why there is no wish to deal with the problem in an active manner and ensure higher tax collection and honest competition with the existing means.

Drastic increase of the excise duties, implementing new taxes and withdrawal of the decreasing of the social tax in addition to imposing the pledge income tax are in no way in line with the promise of the Government to push the economy out of a standstill. It is extremely short-sighted to cut the profitability and motivation of group companies as the biggest taxpayers and promoters of the economy in Estonia. Economic growth in turn will increase the tax base and state budget revenues

The second policy that could support economic growth and would also allow the Government to spend state budget funds on new measures, is to cut public administration costs. “Within the framework of making the governmental sector more efficient, the loss of tax profit or the tax hole should be reduced – it is bigger than the total additional revenue to be achieved by the tax changes in the Government’s activity plan,” said Tamsar.

“Unfortunately, we have to say that the changes proposed so far by the Government, especially in the field of tax policy, make the tax system more complicated, create additional opportunities for increasing dishonest competition in the form of tax fraud, and will not facilitate a more honest tax environment and decreasing the tax deficit. Therefore we wish that the Government would deal with solving the problems and not creating additional ones,” emphasised Luman.

Read the letter sent to the Prime Minister: