Estonian Taxes and Tax Structure 2012Presentation Transcript
ESTONIAN TAXES ANDTAX STRUCTURETax Policy DepartmentRevised in 2012
Population (01.01.2012) 1,339,662Total area 45,227 km2Average salary (2010) 792 EUR (2011 IV quarter) 865 EURCurrency EURGDP (2011) 15,973 mill EUREconomic growth (forecast for 2012) 1.7% (forecast for 2013) 3.0%GDP per capita (2011) 11,918 EURInflation (forecast for 2012) 3.3%
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 – Gambling tax• Plans for the future
Estonian Tax SystemThe main principles of Estonian tax policy:• simple tax system• broad tax base, low ratesEstonia 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
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 taxes1) 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) advertisement tax; 2) road and street closure tax; 3) motor vehicle tax; 4) animal tax; 5) entertainment tax; 6) 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 ActRequirements for Act concerning tax1) 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, assesses amounts of tax and interest due in the cases provided by law, collects tax arrears and implements sanctions against persons who violate tax Acts.
Main tax rates• 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 to the mandatory funded pension system - 2% (payable by employee)• Value added tax - 20% (standard rate), 9% (reduced rate)
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 2011 Total tax revenue 4,342.1 million EUR Total revenue 5,872.2 million EUR Source: Ministry of Finance
Tax Revenue 2011, million € (collected) State taxes 4 342,1 Direct taxes 3 093,8 Personal income tax* 845,9 Corporate income tax 201,1 Social tax 1 801,4 Unemployment insurance 194,0 Land tax 51,5 Indirect taxes 2 112,3 VAT 1 343,3 Excise duties 717,0 Heavy vehicle tax 3,7 Customs tax 29,1 Gambling tax 19,3 Local taxes 25,5* - The amount received by the state + local governments Source: Ministry of Finance
Direct taxes• Personal income tax• Corporate income tax• Social tax• Land tax
Reasons for introducing flat rate in Estonia
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 transparencyThe new law entered into force on January 1st 1994.
Personal income tax revenue 1994-2016 million € Source: Statistical Office of Estonia, Ministry of Finance
Corporate income tax revenue million €* - includes revenue under the prior Income Tax Act (taxable period 1999)
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 ActPeriod of taxation: a calendar yearTax 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% Since 2008 – 21%
Income Tax ActNon-taxable minimum (annual basic exemption): 1728 EURAdditional exemption for state pensions: 2304 EUR for calendar yearIncrease 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) Income of the years 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 taxFor non-residents there is a limited list of taxable income in the Income Tax Act:• income from work under a labour contract or contractors 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 taxFor non-resident natural persons• Period of taxation is a calendar year• Tax rates: 21% and 10%• Estonia has 49 treaties for the avoidance ofdouble taxation (income tax and capitaltaxes) in force
Personal income taxTax allocation of personal income tax paid byresidents• 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 stateNon-residents:• income tax is received by the state
Personal income taxAvoidance of double taxationNatural persons• Exemption method for foreign dividends and certain salary income• Credit method for all other types of foreign income
Corporate income tax
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 Additional funds available for investment Stricter Transparency regulation and exchange of transfer of information pricing Acceleration of economic growth Elimination Introduction of technical of the CFC shortcomings rules
Corporate income taxThe moment of taxation of corporate income is postponed until the distribution of the profitsThe 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 out in Estonia
Corporate income taxThe taxation of profit until 1999 Tax rate 26 % (on gross Income tax profit) 26 EUR Profit earned Dividend 100 EUR payment 74 EUR Time
Corporate income tax Corporate income tax The timing of tax payment under the new system (since 2000)* The tax rate has been decreased since 2005 Income tax No tax 26 EUR Profit Tax rate 26/74 (on net amount, earned Dividend equals to 26% of gross profit) 100 EUR payment 74 EUR Time
Corporate income tax• Tax rate in 2012: 21% (21/79 of the net amount)• Period of taxation: a calendar month
Corporate income taxTax 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)
Corporate income taxProfit earned Gifts in 2009 100 EUR CIT (21/79) 27200 EUR + Expenses unrelated to CIT (21/79) 80Profit earned 1400 EUR potentially taxable income business on 2010 Total CIT 300 EUR liability 294 Tax liability deferred 1000 EUR CIT (21/79) 53 Donations + qualified 200 EUR dividend Dividend / Exemption received liquidation method Taxable Credit 100 EUR 640 EUR amount method + foreign 640 – 100 = 540 144 – 10 = 134 interest CIT (21/79) 144received 100 EUR(source state WHT 10) Time
Corporate income taxThere are 3 main methods introduced in the EstonianIncome Tax Act, the goal of which is to minimize thepossibilities 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
Corporate income taxAvoidance of double taxationCompanies and non-resident’s PEs• Exemption method for qualified (threshold 10%) profit distributions 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 on certain conditions.• Credit method for all other types of foreign income
Structure of declared corporate incometax 2003-2016 million € Source: Statistical Office of Estonia, Ministry of Finance
Social taxTax 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 taxPeriod of taxation• Calendar month for wage income• Calendar year for business income of sole proprietors
Social tax• Tax rate is 33 % of the taxable amount• Social tax payable is personificated andwill be taken into account in makingpension payments.
Social tax• 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, rate 33% Contribution to the (payable by employer or self II pillar (made by employed person) employee) 13% 16% 4% 2% State health State pension Personal pension insurance insurance system account of the person (II system (I pillar) pillar) 2% + 4%= 6%
Social tax revenue 1994-2016 million € Source: Ministry of Finance
Structure of declared social tax 2003-2016 million € Source: Statistical Office of Estonia, Ministry of Finance
Indirect taxes• Value added tax• Alcohol excise duty• Tobacco excise duty• Energy products excise duty• Packaging excise duty (budget revenues insignificant)• Heavy goods vehicle tax• Gambling Tax
Value-added tax (VAT)
VATTaxable person• Person whose taxable supply (excludingimport) exceeds 16 000 EUR in a calendaryear• Voluntary compliance possible for anyone,who carries out economic activity in Estonia
VATTax baseVAT 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
VATTax 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.
VATExempted 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.
VAT revenue 1994-2016 million € Source: Statistical Office of Estonia, Ministry of Finance
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 01.02.2012 Excise duty rates in EU minimum Unit euros excise duty ratesWine andfermented (up to 6 %): 33,30 Hectolitre 0beverage (> 6 %): 76,80 5,70Beer 1 % alcohol in (yearly production up 1,87 hectolitre to 3000 hl): 2,85Intermedi-ate product Hectolitre 164,00 45 Hectolitre ofOther pure alcohol 1490 550alcohol
Excise duty rates on tobacco products 01.01.2012 Product Excise duty rates EU minimum in euros excise duty ratesCIGARETTES:Specific rate 42,18 64 EUR per 1000 cigarettes,(1000 cigarettes) but not less thanAd valorem rate 57 % from weighted average( % of the retail selling 33 % price of cigarettesprice)CIGARS 12 EUR or 5% from the retail(1000 cigars) 191,73 selling priceCIGARILLOS 12 EUR or 5% from the retail(1000 cigarillos) 191,73 selling priceSMOKINGTOBACCO 55,79 40 EUR or 40% from the retail(1 kg ) selling price
ENERGY PRODUCTS: national excise duty rates onMOTOR FUELS and the EU minimum excise levels ENERGY Excise rates in Estonia The EU minimum levels of PRODUCT 01.01.2012 taxation Unleaded 422,77 EUR/ 359 EUR/ petrol 1000 l 1000 l Leaded petrol 422,77 EUR/ 1000 l Gas oil 392,92 EUR/ 330 EUR 1000 l 1000 l Gas oil for 110,95 EUR/ 21 EUR/ specific 1000 l 1000 l purposes LPG 125,26 EUR/ 125 EUR/ 1000 kg 1000 kg Petroleum 330,1 EUR/ 330 EUR 1000 l 1000 l
National excise duty rates applicable to heating fuelsand electricity and the EU minimum excise levels Energy Excise rates in The EU minimum levels of taxation product Estonia 01.01.2012 business non-business Light fuel 110,95 EUR/ 21 EUR/ 21 EUR/ oil 1000 l 1000 l 1000 l Heavy fuel 15,01 EUR/ 15 EUR/ 15 EUR/ oil 1000 kg 1000 kg 1000 kg Petroleum 330,1 EUR/ 1000 l - - Natural 23,45 EUR/ 0,15 EUR/ GJ 0,3 EUR/ GJ gas 1000 m3 Coal and 0,3 EUR/ GJ 0,15 EUR/ GJ 0,3 EUR/ GJ coke Electricity 4,47 EUR/ 0,5 EUR/ 1 EUR/ MWh MWh MWh
Excise duty revenue 1994-2016 million € 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;
Packaging excise duty 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 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 euros; 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 TaxTax 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
Plans for the futureThe main goal for the future- shifting tax burdenfrom income and employment to consumptionand environmental taxes
Average Economic Growth in 2001–2011
Estonian real convergence with the EU
Labour market goals in Lisbon Strategy
Growth expectations GDP growth, Consumer price Current account, % index, % % of GDP 2012 2013 2012 2013 2012 2013IMF 2.0 3.6 3.9 2.6 2.4 2.3Bank of Estonia 1.9 3.6 2.8* 2.9* 2.0 0.9Ministry of Finance(April 2012) 1.7 3.0 3.3 3.0 1.0 0.0*HICP for BoE
General Government budgetary balance 2004-2016 Source: Statistical Office of Estonia, Ministry of Finance
General Government tax burden 1995-2016 (% of GDP)
General Government debt in 2010 (% of GDP)
Tax rate on low wage earners: Tax wedge on labour cost