Estonian Taxes and Tax Structure

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Estonian Taxes and Tax Structure

• Tax Policy Department
• Ministry of Finance
• Revised in August 2009

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General Data
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Outline of the presentation

• The main principles of the Estonian tax system,
  the current tax structure
• Taxation Act
• Direct Taxes
• Reasons for introduction of the flat rate in
  Estonia
• The outcome of the reform
• Personal Income Tax
• Corporate Income Tax
• Social Tax
• Indirect taxes
• VAT
• Excise duties
• Plans for the future

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Estonian Tax System

• The main principles of Estonian tax policy
• simple tax system
• broad tax base, low rates
• Estonia is a European pioneer in income
  taxation
• Flat income tax rate since 1994 (followed by
  Lithuania, Latvia, Russia, Ukraine, Serbia,
  Slovakia, Georgia, Romania, ..)
• Unique corporate tax system since 2000

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Main tax rates- direct taxes

• Corporate income tax 21 on distributed profit
• Personal income tax 21
• Social tax 33 (paid by employer)
• Unemployment insurance payments 2,8 paid by
  employee and 1,4 paid by employer
• Contributions to the mandatory funded pension
  system 2 (paid by employee payments
  temporarily suspended)

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Main tax rates- indirect taxes

• Value added tax - 20(standard rate), 9(reduced
  rate)
• Alcohol - all rates meet EU minimum levels
• Tobacco - transitional period up to 2010 to meet
  EU minimum levels for cigarettes and smoking
  tobacco
• Energy products - all rates meet the EU minimum
  levels except for oil shale for which there is a
  transitional period up to 2013

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Tax Structure
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Tax burden ( of GDP)
Source Estonian Updated Convergence Programme
2008
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Structure of tax burden ( of GDP)
Source Statistical Office of Estonia,
Ministry of Finance
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Structure of general government tax revenue
Source Estonian Updated Convergence Programme
2008
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Tax Revenue 2008
Source Estonian State Budget Law 2008
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Tax Revenue 2008 (collected)
Source Ministry of Finance
- The amount received by the state local
governments - forecast
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Taxation Act
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Estonian Tax System

• To achieve sustainable, socially and regionally
  balanced economic growth Estonian tax system
  consists of state taxes provided and imposed by
  tax acts and local taxes imposed by a rural
  municipality or city council in its
  administrative territory pursuant to law

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Taxation Act

• Taxation act specifies
• Estonian tax system
• main definitions used in all tax acts
• requirements for tax acts
• rights, duties and liability of taxpayers,
  withholding agents, guarantors and tax
  authorities
• regulations of the tax procedure and procedure
  for resolution of tax disputes
• penalty interest rate 0,06 per day

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Direct taxes
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Direct taxes

• Personal income tax
• Corporate income tax
• Social tax
• Land tax
• Heavy goods vehicle tax

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Reasons for introducing flat rate in Estonia
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Reasons for introducing flat rate in Estonia

• High inflation rate - in case of flat rate there
  is no need of frequent adjustment of tax brackets
  
• Flat rate system is easier to administer (for
  both taxpayers and tax administrators)
• More transparency
• The new law entered into force on 1 January 1994.

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The outcome
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Personal income tax revenue 1994-2012
million EEK
Source Statistical Office of Estonia,
Ministry of Finance
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Corporate income tax revenue
million EEK
- includes revenue under the prior Income Tax
Act (taxable period 1999)
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The outcome

• The same tax rate both for individuals and legal
  persons.
• Acceptance of the flat rate among majority of
  people.
• Almost all political parties are in favour of the
  flat rate. Reintroduction of progressive rates is
  very unlikely.

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Personal Income Tax
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Income Tax Act

• Period of taxation a calendar year
• Tax rate 21 (separate tax rate 10 for certain
  pensions and payments to non-residents)
• Decrease of the income tax rate (both for
  individuals and legal persons)
• Until the year 2004 26
• Income of the year 2005 24
• Income of the year 2006 23
• Income of the year 2007 22
• Income of the years 2008 and 2009 21

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Income Tax Act

• Non-taxable minimum (annual basic exemption)
• EEK 27 000 (1726 EUR) in 2009
• Additional exemption for state pensions
• EEK 36 000 (2300 EUR) for calendar year
• Increase of the non-taxable minimum (per year)
• Income of the year 2003 12 000 EEK (767 EUR)
• Income of the year 2004 16 800 EEK (1074 EUR)
• Income of the year 2005 20 400 EEK (1304 EUR)
• The years 2006 and 2007 24 000 EEK (1534 EUR)
• The years 2008 and 2009 27 000 EEK (1726 EUR)

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Income tax reduction
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Corporate Income Tax
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The taxation of profit until 1999
Time
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The timing of tax payment under the new system
(in 2009)
Time
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Corporate income tax

• Tax base
• corporate profits distributed in the tax period
• taxable gifts, donations and representation
  costs
• expenses and payments unrelated to business.
• Losses taken into account (the Estonian
  Commercial Code does not allow to distribute
  profits if the company has losses from previous
  years)

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Corporate income tax

• As of January 1, 2009 the following payments are
  also taxable at the company level and normally
  tax exempt at the level of the recipient
• liquidation proceeds and
• payments made in case of a reduction of the share
  capital of the company or redemption or return of
  shares in the amount in which they exceed
  monetary and non-monetary contributions to the
  equity of the company.

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Corporate income tax

• Avoidance of double taxation as of 2009
• Exemption and credit method extended to
  liquidation proceeds and payments upon reduction
  of capital
• Participation exemption holding threshold is 10

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Gifts 100 EEK
CIT (21/79) 27
Tax liability deferred
Expenses unrelated to business 300 EEK
Total CIT liability 386
CIT (21/79) 80
Profit earned 1000 EEK
Donations 200 EEK
CIT (21/79) 53
Dividend payment 790 EEK
Taxable amount 790 100 690
Inter alia
CIT (21/79) 236
Exemption method
Qualified dividends received 100
Foreign interest received 100 (source state WHT
10)
Credit method 236 10 226
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• There are 3 main methods introduced in the
  Estonian Income Tax Act, the goal of which is to
  minimize the possibilities for tax fraud and
  evasion
• CFC (Controlled Foreign Corporation) rules
  residents have to declare and pay tax on the
  income of off-shore companies under their control
• Stricter regulations for minimising the use of
  transfer-pricing schemes
• Withholding tax of 21 on all payments to
  so-called off-shore companies for services

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Structure of declared corporate income tax
2003-2012
million EEK
Source Statistical Office of Estonia,
Ministry of Finance
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Social Tax
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Social tax, rate 33 (payable by employer or self
employed person)
Contribution to the II pillar (made by employee)
16
13
4
2
State health insurance system
State pension insurance system (I pillar)
Personal pension account of the person (II
pillar) 2 4 6
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Social tax revenue 1994-2012
million EEK
Source Estonian Updated Convergence Programme
2008
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Structure of declared social tax 2003-2012
million EEK
Source Statistical Office of Estonia,
Ministry of Finance
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Indirect taxes
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• Value added tax
• Alcohol excise duty
• Tobacco excise duty
• Energy products excise duty
• Packaging excise duty (budget revenues
  insignificant)
• Gambling tax

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Value-added Tax (VAT)
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VAT

• Taxable person
• Person whose taxable supply (excluding import)
  exceeds 250 000 EEK (16 000 EUR) in a calendar
  year
• Voluntary compliance possible for anyone, who
  carries out economic activity in Estonia

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VAT

• Tax base
• VAT is charged on
• transactions of goods and services within
  Estonia
• intra-Community acquisitions of goods and
  services
• importation of goods and services
• provision of services which are taxable in
  Estonia, supplied by the foreign taxable person

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VAT

• Tax rates
• Standard rate is 20.
• Reduced rate is 9 (books, newspapers, medicines,
  accommodation).
• Zero rated export intra-Community supply
  vessels and aircrafts used on international
  routes, including equipment and fuel goods and
  services for consumption supplied on board of
  vessels and aircrafts.

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VAT

• Exempted goods and services are
• postal services
• health services
• social services
• insurance services
• services for the protection of children
• transportation of sick, injured or disabled
  persons
• supply of immovables
• the leasing and letting of immovables, etc.

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VAT revenue 1994-2012
million EEK
Source Statistical Office of Estonia,
Ministry of Finance
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Excise duties
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Duty rates

• Alcohol all rates meet EU minimum levels
• Tobacco transitional period up to 2010 to meet
  EU minimum levels for cigarettes and smoking
  tobacco
• Energy products all rates meet the EU minimum
  levels except for oil shale for which there is a
  transitional period up to 2013

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Excise duty revenue 1994-2012
million EEK
Source Statistical Office of Estonia,
Ministry of Finance
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ENERGY PRODUCTS national excise duty rates on
MOTOR FUELS and the EU minimum excise levels
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BIOFUEL EXCISE EXEMPTION

• The permission which allows Estonia to exempt
  biofuels from excise duty was issued by the EU
  Commission on 27th of July 2005. Its valid for
  six years. The following biofuels only are
  exempted from fuel excise duty
• 1. fuel for which the first four digits of the CN
  code are 15071518 and that are not of synthetic
  origin (the raw material of biodiesel)
• 2. fuel which is produced from biomass and for
  which the eight digits of the CN code are
  3824 90 55 or 3824 90 803824 90 99 (the raw
  material of biodiesel)
• 3. fuel which is produced from agricultural
  products or from products of vegetal origin and
  for which the eight digits of the CN code are
  2207 20 00 (denatured ethyl alcohol) or
  2905 11 00 (methyl alcohol).
• If biofuel is mixed with some other fuel,
  exemption from excise duty is applied on the
  portion of biofuel contained in the mixture only.

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National excise duty rates applicable to heating
fuels and electricity and the EU minimum excise
levels
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Plans for the future
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Future Plans for Tax Policy

• Lower labour-related taxes and increased
  consumption-related and other indirect taxes
• increase of excise duties
• increase of environmental taxes
• decrease of income tax
• Maintaining the current simple tax system and
  broad tax base.
• Improving tax administration

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The main goal for the future - shifting tax
burden from income and employment to consumption
and environmental taxes
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Thank you!
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Background information
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Average Economic Growth in 19962006
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Estonian real convergence with the EU
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General Government budgetary balance 2004-2012
Source Statistical Office of Estonia, Ministry
of Finance
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General Government tax burden 1995-2012 ( of GDP)
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General Government debt in 2007 ( of GDP)
84
Tax rate on low wage earners Tax wedge on labour
cost