Estonian Taxes And Tax Structure 2011

Estonian Taxes and Tax Structure Tax Policy Department Ministry of Finance Revised in 2011

General Data Population (01.01.20 11 ) 1,34 0 , 194 Total area 45,227 km 2 Average salary (20 10 ) 792 EUR Currency E UR GDP (20 10 ) 14,305 mill EUR Economic growth ( forecast for 2011) 7 . 5 % (forecast for 2012 ) 3.0 % GDP per capita (20 10 ) 10 , 674 EUR Inflation (forecast for 20 11 ) 4.9 %

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

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

Taxation Act

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

State taxes 1) excise duties; 2) income taxes; 3) gambling tax; 4) value added tax; 5) land tax; 6) social tax; 7) customs duty; 8) heavy goods vehicle tax

Local taxes 1) sales tax; 2) boat tax; 3) advertisement tax; 4) road and street closure tax; 5) motor vehicle tax; 6) animal tax; 7) entertainment tax; 8) parking charge.

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

Taxation Act
“ Tax” is
a single or periodical financial obligation
imposed by an Act or by a local government council regulation according to Local Taxes Act
for the performance of the public law functions or to obtain revenue to perform these functions
subject to performance pursuant to the procedure, in the amount and on the due dates prescribed by an Act
collected without direct compensation therefore .

Taxation Act
Requirements for Act concerning tax
1) name of the tax;
2) object of taxation;
3) tax rate;
4) taxpayer;
5) recipient of or place of receipt of the tax;
6) due date or term for payment of the tax;
7) procedure for payment of the tax;
8) procedure for implementation of the Act concerning a tax;
9) possible tax incentives.

Tax authority
The tax authority for state taxes is the Tax and Customs Board with its regional offices . The tax authority operates within the area of government of the Ministry of Finance.
Tax authority verifies the correctness of tax payments, assess es amounts of tax and interest due in the cases provided by law, collects tax arrears and implements sanctions against persons who violate tax Acts.

Corporate income tax – 21% on distributed profit
Personal income tax – 21%
Social tax – 33% (payable by employer)
Unemployment insurance payment – 2 , 8 % payable by employee and 1 , 4 % payable by employer
Contribution t o the mandatory funded pension system - 2% (payable by employee)
Value added tax - 20 % (standard rate), 9 % (reduced rate)
Main tax rates

Tax Structure

Structure of tax burden (% of GDP ) Source: Statistical Office of Estonia, Ministry of Finance

Structure of general government tax revenue Source: Statistical Office of Estonia, Ministry of Finance

Tax burden ( % of GDP) Source: Statistical Office of Estonia, Ministry of Finance

State Budget Tax Revenue 20 10 Total tax revenue 4 045,6 m illion EUR Total revenue 5 516,1 m illion EUR Source: Ministry of Finance

Tax Revenue 20 10, million € ( collected) * - The amount received by the state + local governments Source: Ministry of Finance

Direct taxes

Personal income tax
Corporate income tax
Social tax
Land tax
Heavy goods vehicle tax
Gambling tax
Direct taxes

Reasons for introdu c in g flat rate in Estonia

Reasons for introducin g 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 o n January 1st 1994 .

The outcome …

Personal income tax revenue 1994-201 5 million € Source: Statistical Office of Estonia, Ministry of Finance

Corporate income tax revenue * - includes revenue under the prior Income Tax Act (taxable period 1999) million €

The outcome
The same tax rate b oth for individuals and legal persons .
Most of Estonian people like flat rate.
Almost all political parties are in favour of flat rate. Reintroduction of progressive rates is very unlikely.

Personal Income Tax

Personal income tax
Residents pay tax on their total worldwide income.
Non-residents pay tax only on their income received from Estonian sources.
Individuals are Estonian residents if they:
have a permanent home in Estonia, or
stay in Estonia 183 days or more during any 12-month period.

Income Tax Act
Period of taxation: a calendar year
Tax rate: 2 1 % (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 y ear 2004 – 26%
Income of the y ear 2005 – 24%
Income of the y ear 2006 – 2 3 %
Income of the year 2007 – 22%
Since 2008 – 21%

Income Tax Act
Non-taxable minimum (annual basic exemption): 1728 EUR
Additional exemption for state pensions : 230 4 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 – 2 0 4 00 EEK (13 04 EUR)
Income of the year s 2006 - 2007 – 24 000 EEK (1534 EUR)
Income of the years 2008- 2010 – 27 000 EEK (1726 EUR)
Since 2011 - 1728 EUR

Income tax reduction

Personal income tax
For non-residents there is a limited list of taxable income in the Income Tax Act:
income from work under a labour contract or contractor's agreement in Estonia;
income from a business carried on in Estonia;
interest income received from Estonia (only if it is substantially higher than that on similar debt claims) ;
royalties;
income from the lease of assets located in Estonia;
gains from disposal of assets located in Estonia;
directors' fees paid by Estonian enterprises;
income of a sportsman or an artist from his activities in Estonia
pensions and scholarships.

Personal income tax
For non-resident natural persons
Period of taxation is a calendar year
Tax rates: 2 1 % and 1 0 %
Estonia has 47 treaties for the avoidance of double taxation (income tax and capital taxes) in force

Personal income tax
Tax allocation of personal income tax paid by residents
The amount received by local governments is 11 .4 % of taxable income (deductions are not taken into account), the excess amount is received by the state
Income tax paid on pensions and capital gain is received by the state
Non-residents:
income tax is received by the state

Personal income tax
Avoidance of double taxation
Natural persons
Exemption method for foreign dividends and certain salary income
Credit method for all other types of foreign income

Corporate Income Tax

Corporate tax reform in year 2000
The ultimate goal of the reform was promotion of business and acceleration of economic growth by making additional funds available for investment

Corporate income tax Elimination of technical shortcomings Additional funds available for investment Stricter regulation of transfer pricing Acceleration of economic growth Introduction of the CFC rules Transparency and exchange of information

The moment of taxation of corporate income is postponed until the distribution of the profits
The system applies to:
Estonian resident companies
legal persons that are established pursuant to Estonian law
permanent establishments (PE) of non-resident companies PE is an entity through which the business of a non-resident is carried on in Estonia

Time The taxation of profit until 1999 Tax rate 26 % (on gross profit) Corporate income tax Income tax 26 EEK Dividend payment 74 EEK Profit earned 100 EEK

Time The timing of tax payment under the new system (since 2000)* The tax rate ha s be en decreased since 2005; see next slide Corporate income tax Income tax 26 EEK Dividend payment 74 EEK Profit earned 100 EEK Tax rate 26/74 (on net amount, equals to 26% of gross profit) No tax

Tax rate in 2011 : 2 1 % (2 1 /7 9 of the net amount)
Period of taxation: a calendar month

Tax base
corporate profits distributed in the tax period ;
dividends and other profit distributions, incl. liquidation proceeds and payments made on reduction of company’s equity or redemption or return of shares
taxable gifts, donations and representation expenses;
expenses and payments unrelated to business.
Fringe benefits are taxable at the level of employer.
Losses – taken into account (the Estonian Commercial Code does not allow to distribute profits if the company has losses from previous years)

+ qualified dividends received 100 EUR + foreign interest received 100 EUR (source state WHT 10) Donations 200 EUR Expenses unrelated to business 300 EUR Gifts 100 EUR 1400 E UR potentially taxable income Tax liability deferred Profit earned in 20 09 200 E UR + Profit earned on 20 10 1000 E UR Dividend / liquidation 640 E UR Exemption method Taxable amount 64 0 – 100 = 540 CIT (21/79) 27 CIT (21/79) 80 CIT (21/79) 53 CIT (21/79) 144 Credit method 144 – 10 = 134 Total CIT liability 294 Time Corporate income tax

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 2 1 % on all payments to so-called off-shore companies for services

Avoidance of double taxation
Companies and non-resident’s PEs
Exemption method for qualified (threshold 10%) profit distribution s
the income tax will not be charged on dividends or on payments upon reduction of share capital or contributions, redemption of shares or liquidation of a legal person o n certain conditions.
Credit method for all other types of foreign income

Structure of declared corporate income tax 2003-201 5 million € Source: Statistical Office of Estonia, Ministry of Finance

Social Tax

Social tax
Tax Base
Employers' payments to natural persons ( wage income ) – tax payable by employers
in cash
in kind (fringe benefits)
Business income of sole proprietors – tax payable by self employed persons

Social tax
Period of taxation
Calendar month for wage income
Calendar year for business income of sole proprietors

Tax rate is 33 % of the taxable amount
Social tax payable is personificated and in making pension payments will be taken into account.
Social tax

Social tax , rate 33% (payable by employer or self employed person) S tate health insurance system 13% 16% S tate pension insurance system (I pillar) Personal pension account of the person (II pillar) 2% + 4%= 6% 4% Contribution to the II pillar (made by employee ) 2%
Tax allocation IF the person has joined the II pension pillar (compulsory for the persons who have born in 1983 or later; voluntary for older people)
Social tax

Social tax revenue 1994-201 5 m illion € Source: Ministry of Finance

Structure of declared social tax 2003-201 5 million € Source: Statistical Office of Estonia, Ministry of Finance

Indirect taxes Ministry of Finance of Estonia

Value added tax
Alcohol excise duty
Tobacco excise duty
Energy products excise duty
Packaging excise duty (budget revenues insignificant)
Gambling Tax
Indirect taxes

Value-added Tax (VAT)

VAT
Taxable person
Person whose taxable supply (excluding import) exceeds 1 6 000 EUR in a calendar year
Voluntary compliance possible for anyone, who carries out economic activity in Estonia

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

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.
VAT

Exempted goods and services are:
p ostal 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.
VAT

VAT revenue 1994-201 5 million € Source: Statistical Office of Estonia, Ministry of Finance

Excise duties

Duty rates
Alcohol and tobacco products – all rates meet EU minimum levels
Energy products – all rates meet the EU minimum levels except for oil shale for which there is a transitional period up to 2013

Excise duty rates on alcohol 01.01.20 11

Excise duty rates on tobacco products 01.01.20 11

ENERGY PRODUCTS: n ational excise duty rates o n MOTOR FUELS and the EU minimum excise levels ENERG Y PRODUCT Excise rates in E stonia 01.0 1 .20 11 The EU minimum levels of taxation Unleaded petrol 422,77 EUR / 1000 l 359 EUR/ 1000 l Leaded petrol 422,77 EUR / 1000 l Gas oil 392,92 EUR / 1000 l 330 EUR 1000 l Gas oil for specific purposes 110,95 EUR / 1000 l 21 EUR / 1000 l LPG 125,26 EUR / 1000 kg 125 EUR / 1000 kg Petroleum 330,1 EUR / 1000 l 330 EUR 1000 l

National excise duty rates applicable to heating fuels and electricity and the EU minimum excise levels Energy product Excise rates in Estonia 01.0 1 .20 11 The EU minimum levels of taxation business non-business Light fuel oil 110,95 EUR/ 1000 l 21 EUR/ 1000 l 21 EUR/ 1000 l Heavy fuel oil 15,01 EUR/ 1000 kg 15 EUR/ 1000 kg 15 EUR/ 1000 kg Petro leum 330,1 EUR/ 1000 l - - Natural gas 23,45 EUR/ 1000 m 3 0,15 EUR/ GJ 0,3 EUR/ GJ Coal and coke 0,3 EUR/ GJ 0,15 EUR/ GJ 0,3 EUR/ GJ Ele ctricity 4,47 EUR/ MWh 0 , 5 EUR/ MWh 1 EUR/ MWh

Excise duty revenue 1994-201 5 m illion € Source: Statistical Office of Estonia, Ministry of Finance

Packaging excise duty

Object of taxation :
Excise duty on packaging shall be imposed on packaging of goods placed on the market in Estonia or acquired in and imported from another Member State of the European Union .
Exemption from excise duty incidentally are:
1) packaging concerning which a deposit has been established under the Packaging Act, except metal packaging of beverages, and from which at least 85 percent of each class of packaging material is recovered as of 1 January 2012 ;

2) metal packaging of beverages of which of which at least 50 percent is recovered as of 1 January 2010 ;
3 ) as of 1 January 2009, other packaging recovered to the extent provided for in § 36 of the Packaging Act .

Gambling Tax

Gambling Tax
Objects of gambling tax
1) gambling tables and gambling machines used for organising games of chance and on gambling machines used for organising games of skill;
2) in the event of organising a lottery, the total amount received from the sale of lottery tickets ;
3) in the event of organising a commercial lottery, the winning pot whose value exceeds 10 000 euro s;
4) in the event of organising a toto ( betting+totalisator ) , the total amount net revenue of bets ;
5) in the event of organising an online game of chance or an online game of skill, the net revenue of bets ;
6 ) in the event of organising a tournament of a game of chance, the total amount of participation fees .
Gambling tax is paid by gambling operators .

Gambling Tax
Tax rates:
1) for the gambling table – 1 278.23 euro per table in month ;
2) for the gambling machine – 447.38 euro per in month euro per gambling machine ;
3) 31.95 euro per gambling machine of game of skill ;
4) 18 % from the sale of lottery tickets ;
5) 18 % from the winning fund of the commercial lottery ;
6 ) 5 % for the toto, amount received from net revenue ;
7) 5 % for the online game, amount received from net revenue;
8) 5 % for the tournament of a game of chance (amount received from participation fees) .

Plans for the future

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

The main goal for the future- shifting tax burden from income and employment to consumption and environmental taxes Plans for the future

Thank you!

Background information

Average Economic Growth in 1996 – 20 10

Estonian real convergence w ith the EU

Labour market goals in Lisbon Strategy

Growth expectations

General Government budgetary balance 200 4 -20 15 Source: Statistical Office of Estonia, Ministry of Finance

General Government tax burden 1995 -20 15 ( % of GDP)

General Government debt in 20 10 (% of GDP)

Tax rate on low wage earners: Tax wedge on labour cost

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Estonian Taxes And Tax Structure 2011

by Rahandusministeerium/Ministry of Finance of Estonia on Jan 12, 2010

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Estonian Taxes And Tax Structure 2011 — Presentation Transcript