Estonian Chamber of Commerce and Industry: Amendments of tax laws are made in haste without impact analyses

The Ministry of Finance gave less than three business days to give an opinion on the tax law amendment bill. In its response, the Chamber hopes that as fast as the concrete tax proposals have been written into the bill and the interest groups had to analyse them, the state will also propose and implement measures to limit public sector spending.

"It is clear that it is much easier to assess the effects of tax changes in retrospect. In a similar way, the state has recently assessed, for example, the effect of raising the alcohol excise duty, as well as the impact related to the fringe benefit on passenger cars. But now the question is why are we doing it again and expecting different results, said Mait Palts, director general of the Estonian Chamber of Commerce and Industry, and added that tax changes affecting hundreds of millions of euros are not so critical today, that there is no need to do impact analysis or that interest groups should not have more than three days to express an opinion.

The increase in the VAT rate for accommodation services must be excluded from the bill
"We are clearly against raising the VAT rate for accommodation services as it is planned today. As the first step, a comprehensive impact analysis must be carried out to understand what effect the increase in the VAT rate will have, for example, on the growth of the submerged economy or rural tourism businesses. Since the deadline for the tax increase is planned for 01.01.2025, there is no need to adopt it urgently," said Palts and emphasized that raising taxes does not always bring more money to the budget, and in the worst case, thoughtless changes can lead to negative consequences.

Previous analyses show that an increase in the VAT will reduce the number of visitors to accommodation companies. In 2014, the analysis carried out by the Estonian Economic Institute pointed out that increasing the VAT rate for accommodation services to 20 percent would reduce the number of visitors by 6%. If the tax rate is increased to 22 percent, the decrease in the number of visitors will be even bigger. As a result, VAT receipts from accommodation services also decrease.

The explanatory note of the bill also states that if tourism demand decreases by 11.9 percent due to the tax increase, then the net effect on the state budget will be negative. Although the Ministry of Finance does not consider such a scenario very likely, the Chamber of Commerce is of the opposite opinion.

According to the Chamber, increasing the tax rate also affects the receipt of labour taxes, promotes the growth of the submerged economy, has a negative effect on accommodation companies in rural areas and directly affects the competitiveness of our accommodation sector among both foreign and domestic tourists. It must also be understood that every tourist who does not arrive in Estonia will not consume the services and products here, which again means a direct economic loss.

Increasing the excise duty on alcohol
According to Palts, the increase in excise duties on alcohol must be implemented together with neighbouring countries. "Cross-border trade with Finland has been an important source of income for Estonia, but we also remember a situation in recent history where cross-border trade with Estonia was an important source of income for Latvia, or vice versa - a significant excise tax deficit collection for us." 

It remains unclear to the Chamber whether the state, when fixing the 5% excise tax rate, has considered the fact that the value added tax will also rise and together this will lead to a higher price increase, which in turn will encourage even more cross-border trade. Since Latvia's excise duties are still lower than Estonia's, it is likely that people will once again start buying goods from Latvia. And not just alcohol. Therefore, the impact of the increase in alcohol excise duty on cross-border trade must be thoroughly evaluated.

The Chamber is of the opinion that, considering the high inflation and the planned 2% increase in the VAT rate, it is reasonable to increase the excise duty on alcohol by 3% at once and every second year if necessary.

Increasing the income tax on regular dividends from 14% to 22%
Palts pointed out that the change reduces companies' confidence in a stable tax environment and reduces investment confidence. "Furthermore, removing the distinction is directly contrary to the goal included in the coalition agreement, that Estonia is the best country in Europe in terms of business and tax environment and foreign agreements, in which to create and maintain a company's headquarters and through which to manage assets globally," he added.

The Chamber of Commerce opposes processing the change related to the removal of the lower income tax rate for regularly distributed profits in a hurry and without a thorough impact analysis. An impact analysis is needed in order to understand the effects of the planned change on the company's dividend policy and thus also the direct financial effects on the state budget or the business environment in general.

Advance payment changes of credit institutions must be excluded from the bill
According to the bill, from year 2025 a 22% rate will apply to credit institutions' advance payments instead of the current 14% rate. The problem is that the Ministry of Finance wants to process the change in an urgent manner, which does not allow for a thorough impact analysis. There is also no substantive need for urgent proceedings. Palts also emphasizes that the explanatory letter of the bill states that the impact of the planned change is very big, but it has not been evaluated at all.

The Chamber considers that the change related to credit institutions' advance payments must not be processed in a hurry and without an impact analysis. The Chamber of Commerce is also fundamentally opposed to the amendment and proposes to leave out of the bill the points related to this amendment. As an alternative, the Chamber proposes a solution to invalidate the provisions related to advance payments by credit institutions in the Income Tax Act. In this case, credit institutions would be subject to the same rules as other companies.

Before introducing new taxes, the established taxes must be collected
"Entrepreneurs understand that the country's economic situation needs to be fixed and today's security situation needs additional funding, which in turn may mean an increase in the tax burden to some extent. However, we are consistently of the opinion that tax changes should not be rushed," Palts explained and emphasized that before the introduction of new taxes or the raising of tax rates, everything must be done to collect the taxes imposed so far and to use all measures to reduce public sector costs that are not directly related to the provision of primary public services.