Mait Palts: Estonian Corporate Income Tax System Must Remain

The impact of the global corporate tax initiative in its current form on Estonian companies, particularly on our internationally operating companies would be clearly negative. We have a real risk of losing in tax revenues, attractiveness of our system as well as competitive edge.

We have to agree with the assessment of the problem and its seriousness by the Minister of Finance as well as Chairman of the Finance Committee, but at the moment it seems that when the plan was first developed in the PECD, its impact on Estonia was seriously underestimated or there were hopes that there would be no effect. However, not it has become evident that the impact would be huge and possibly more negative than we can predict, because not all details have been formulated yet.

The corporate income tax system in Estonia can be criticised only for it being difficult to understand in many countries due to its simplicity and uniqueness. Many countries still use a century old models where taxes are collected at the moment when revenue is created, irrespective of the fact if the company actually has money on the account or what are the company’s investment plans. Clearly, the countries who are used to the traditional system find it difficult to transpose and understand our system. Therefore, since joining the EU, attempts have been made to put pressure on Estonia so that we would change our system back to the old-school model.

Compared to many other countries, the Estonian system is much more efficient and supports the development of entrepreneurship much better. The share of income tax paid by Estonian companies in the GDP is comparable to other countries according to the OECD statistics. For example, in 2018, this indicator was 2% in Estonia, 2.4% in Finland, 2.1% in Germany, but only 1% in the USA. At that, we should keep in mind that the corporate income tax rates arising from the law are mostly higher than Estonia in the reference countries: Estonia 20%, Finland 20%, Germany 30% and the USAs 26%. Thus, one might say that Estonian companies are already now paying income tax more or in an amount comparable to many other countries that use the traditional corporate income tax system. Furthermore, it is not possible to accuse us of failing to collect taxes, because the tax gap in relation to GDP is unarguably one of the smallest in Europe. Furthermore, the sum spent on collecting one tax euro is one of the lowest.

It is in the interests of Estonia to support initiatives that help preventing tax avoidance on the global level. It is clear that there are countries and regions in the world where taxes can be avoided and in the interests of fair competition it is justified that this phenomenon is fought against jointly. But it should not destroy honest tax competition between countries. Especially in a situation where numbers show that in the Estonian context it is not a problem and we have not been blamed for that either.

The confrontation with the OECD and some big countries is not the best solution, but as things stand now, the damages arising for us from the income tax initiative would be extensive. We should clearly formulate the conditions, in case of which, if met, Estonia would be ready to participate in the discussions during which there would be advancement from the current political agreements to legally binding directives. We should clearly express that our system is currently functioning without problems and Estonia must have the opportunity to maintain it. The problems lie elsewhere, where there is inability to collect the imposed taxes. Thus we must hope that the countries for whom the OECD initiative and its consensual supporting are important, reach the understanding why a well-functioning tax system is especially important for a small country.

If the target is to decrease tax avoidance, we support this goal, but it is difficult to understand why we should sacrifice a well-functioning system that successfully serves the same purpose in this fight. We could equally suggest all others to implement the Estonian corporate income tax system, because in addition to tax revenue, it helps companies to grow.