Security Income Tax planned by the Government is Detrimental to Estonia’s Competitiveness

state the Estonian Chamber of Commerce and Industry and the Estonian Employers’ Confederation.

With the security income tax, the Ministry of Finance wishes to limit the taking the profit of subsidiaries located in Estonia out to the parent companies located abroad by using loans.

“We agree that some companies do use this solution to avoid taxes and the problem must be dealt with. However in our opinion, establishing the security income tax is not a proportionate measure, because that is harmful for the business environment and complicates unreasonably the activities of law-abiding companies,” said Director General of the Estonian Chamber of Commerce and Industry, Mait Palts. “Although the aim is to prove that profit is taken out of Estonia in bad faith, this tax has a negative impact on local companies – the tax cannot be imposed so that it would only be applicable for groups with foreign parent companies. The later would also be unjustified, because we cannot say that the majority of international groups are involved in using loans to take profit out of Estonia.”

The security income tax means increased red tape and direct economic costs for companies, explained head of the Estonian Employers’ Confederation Toomas Tamsar. “The Minister of Finance does not understand that while trying to solve a problem, he is actually taxing the daily economic activities of companies. This is, again, detrimental for the Estonian tax environment, which due to the recent initiatives of the Ministry of Finance Is already rapidly deteriorating,” said Tamsar.

“While at the moment, a parent company can use the funds of another company for the investments of one subsidiary, taxing such transactions will force companies to obtain resources via bank loans, on which they have to pay an interest. This will result in decreased investments and overall deterioration of the business environment,” added Tamsar.

The business organisations are worried that yet again, the government is working on an idea, the impact of which on the business environment has not been analysed. Before imposing the tax, one should answer the questions such as, what is the specific financial impact on companies operating in Estonia, how does the new tax influence foreign investments, what is the impact on the business environment in the future and what are the alternatives for solving the problem.
In the opinion of the Chamber and the Employers, the planned security income tax has many issues that need analysing – why is there a plan to tax namely loans the term of which is over two years, why would the deposited security income tax be transferred to the advance payment account if repaid etc. The business organisations recently turned to the Minister of Finance as well as the Tax and Customs Board with these as well as other questions.

Due to failure to carry out a thorough analysis, the Ministry has not noticed the fact that the problem could be solved with the currently applicable legal acts. For example, according to the Supreme Court rulings and applicable legislation, it is possible to tax an ostensible transaction according to its actual content. There are easier measures for addressing the issue – direct contacts with the companies, public information, notifying etc.

The government has promised to stand for the economic development and promote entrepreneurship. The Chamber and the Employers’ Confederation are worried that the steps taken so far are carrying a contrary message. Small positive changes, such as business account for micro companies, cannot cover the damages done with tax changes.

Background:

• On 19 January, the government commissioned the Minister of Finance to draft an act establishing the security income tax on certain loans given inside groups, also on financing transactions made via the group account, if such transactions are made with the aim of lending the profit earned in Estonia to other group companies. The planned date of entry into force is 01.01.2018.
• The new tax would influence 11,400 Estonian companies that are a part of a group. The group turnover makes up over 60 percent of the turnover of all companies.
• In 2016, 94 companies out of 100 biggest tax payers were group parent companies or belonged to a group, in total they paid 30% of the tax revenue collected to the state budget, which is over 2 billion euros.
• According to Statistics Estonia, in total 35% or approximately 225,000 persons were employed in groups in 2015.