Estonian Taxes and Tax Structure 2013

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Estonian Taxes and Tax Structure 2013

  1. 1. ESTONIAN TAXES AND TAX STRUCTURE Tax Policy Department Revised in February 2013
  2. 2. Population (01.01.2013) 1,286,540 Total area 45,227 km2 Average salary (2011) 839 EUR (2012 IV quarter) 916 EUR Currency EUR GDP (2011) 15,973 million EUR Economic growth (estimation for 2012) 3.0% (forecast for 2013) 3.0% GDP per capita (2011) 11,918 EUR Inflation (forecast for 2013) 3.5%
  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
  4. 4. 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
  5. 5. 5 Taxation Act
  6. 6. 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
  7. 7. 1) income tax; 2) social tax; 3) land tax; 4) gambling tax; 5) value added tax; 6) customs duty; 7) excise duties; 8) heavy goods vehicle tax. State taxes
  8. 8. 1) advertisement tax; 2) road and street closure tax; 3) motor vehicle tax; 4) animal tax; 5) entertainment tax; 6) parking charge. Local taxes
  9. 9. 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
  10. 10. 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.
  11. 11. 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.
  12. 12. 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.
  13. 13. • Corporate income tax – 21% on distributed profit • Personal income tax – 21% • Social tax – 33% (payable by employer) • Unemployment insurance payment – 2,0 % payable by employee and 1,0% payable by employer (from Jan 1, 2013) • Contribution to the mandatory funded pension system - 2% (payable by employee) • Value added tax - 20% (standard rate), 9% (reduced rate) Main tax rates
  14. 14. Tax structure
  15. 15. 0 5 10 15 20 25 30 35 40 2000 2002 2004 2006 2008 2010 2012* 2014* 2016* Direct taxes Indirect taxes Social security contributions Structure of tax burden (% of GDP) Source: Statistical Office of Estonia, Ministry of Finance
  16. 16. Structure of tax revenue 0% 20% 40% 60% 80% 100% Personal income tax Corporate income tax Social contributions VAT Exice duties Land tax Other taxes Source: Statistical Office of Estonia, Ministry of Finance
  17. 17. Tax burden ( % of GDP) Source: Statistical Office of Estonia, Ministry of Finance 31.0 30.2 31.0 30.8 30.6 30.6 30.7 31.4 31.9 35.9 34.1 32.8 33.2 32.6 32.2 32.0 32.0 29 30 31 32 33 34 35 36 37 2000 2002 2004 2006 2008 2010 2012* 2014* 2016*
  18. 18. State Budget Tax Revenue 2012 Total tax revenue 4,775.3 million EUR Total revenue 6,427.2 million EUR 5.6% 5.3% 31.3% 16.3% 0.1% 0.6% 40.5% 0.4% Personal income tax Corporate income tax VAT Excise duties Heavy vechile tax Customs duty Social tax Gambling tax Source: Ministry of Finance
  19. 19. Tax Revenue 2012, million € (collected) * - The amount received by the state + local governments State taxes 4 775,3 Direct taxes 3 384,6 Personal income tax* 931,3 Corporate income tax 252,4 Social tax 1 932,7 Unemployment insurance 209,5 Land tax 58,7 Indirect taxes 2 323,9 VAT 1 493,7 Excise duties 776,2 Heavy vehicle tax 3,9 Customs tax 29,4 Gambling tax 20,7 Local taxes 9,3 Source: Ministry of Finance
  20. 20. Direct taxes
  21. 21. • Income tax (personal and corporate income tax both stipulated in the Income Tax Act) • Social tax • Land tax Direct taxes
  22. 22. Reasons for introducing flat rate in Estonia
  23. 23. 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.
  24. 24. The outcome…
  25. 25. Personal income tax revenue 1994-2016 (million EUR) million € 0 200 400 600 800 1,000 1,200 1,400 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* 2014* 2016* Local government State Source: Statistical Office of Estonia, Ministry of Finance
  26. 26. Corporate income tax revenue 0 50 100 150 200 250 300 1997 1999 2001 2003 2005 2007 2009 2011 2013* 2015* 78.5 122.3 104.5 54.6 47.8 86.2 137.8 161.2 159.5 199.6 261.0 266.3 256.3 193.8 201.1 258.0 234.0 243.1 256.0 268.0 * - includes revenue under the prior Income Tax Act (taxable period 1999) million €
  27. 27. Personal income tax
  28. 28. 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.
  29. 29. 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% Since 2008 – 21%
  30. 30. Income Tax Act Non-taxable minimum (annual basic exemption): 1728 EUR Additional exemption for state pensions: 2304 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) 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
  31. 31. 26 24 23 22 21 20 19 32 51 64 90 109 128 144 0 20 40 60 80 100 120 140 160 18 20 22 24 26 28 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* 2014* 2016* % Income tax rate (left scale) Monthly basic exemption (€, right scale) Income tax reduction
  32. 32. 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.
  33. 33. Personal income tax For non-resident individuals • Period of taxation is a calendar year • Tax rates: 21% and 10% • Estonia has 50 treaties for the avoidance of double taxation (income tax and capital taxes) in force
  34. 34. Personal income tax Tax allocation of personal income tax paid by residents • The amount received by local governments (from Jan 1, 2013) is 11.57% 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
  35. 35. Personal income tax Avoidance of double taxation Individuals • Exemption method for foreign dividends and certain salary income • Credit method for all other types of foreign income
  36. 36. Corporate income tax
  37. 37. 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
  38. 38. 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
  39. 39. Corporate income tax 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 out in Estonia
  40. 40. Tax rate 26 % (on gross profit) Income tax 26 EUR Dividend payment 74 EUR Profit earned 100 EUR Time The taxation of profit until 1999 Corporate income tax
  41. 41. Income tax 26 EUR Dividend payment 74 EUR Profit earned 100 EUR Tax rate 26/74 (on net amount, equals to 26% of gross profit) No tax Time The timing of tax payment under the new system (since 2000)* The tax rate has been decreased since 2005 Corporate income tax
  42. 42. Corporate income tax • Tax rate in 2013: 21% (21/79 of the net amount of the dividend or other profit distribution) • Period of taxation: a calendar month
  43. 43. Corporate income tax 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)
  44. 44. Corporate income tax + qualified dividend received 100 EUR + foreign interest received 100 EUR (source state WHT 10) Donations 200 EUR Expenses unrelated to business 300 EUR Gifts 100 EUR 1400EURpotentiallytaxableincome Taxliabilitydeferred Profit earned in 2010 200 EUR + Profit earned in 2011 1000 EUR Dividend / liquidation 640 EUR Exemption method Taxable amount 640 – 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
  45. 45. 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 21% on all payments to so-called off- shore companies for services
  46. 46. Corporate income tax Avoidance of double taxation Companies 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
  47. 47. Structure of declared corporate income tax 2003-2016 million € 0 100 200 300 2003 2004 2005 2006 2007 2008 2009 2010 2011 20122013*2014*2015*2016*Payments to non-resident legal persons Non-business expenses Charitable gifts and donations exceeding non-taxable amount Fringe benfits Distributed profit (dividends paid out) Source: Statistical Office of Estonia, Ministry of Finance
  48. 48. Social tax
  49. 49. Social tax Tax Base • Employers' payments to individuals (wage income) – tax payable by employers • in cash • in kind (fringe benefits) • Business income of self- employed– tax payable by self- employed persons
  50. 50. Social tax Period of taxation • Calendar month for wage income • Calendar year for business income of self- employed
  51. 51. Social tax • Tax rate is 33 % of the taxable amount • Social tax payable is personificated and will be taken into account in making pension payments or health insurance benefits.
  52. 52. • 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, rate 33% (payable by employer or self employed person) State health insurance system 13% 16% State 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%
  53. 53. Social tax revenue 1994-2016 (million EUR) million € 0 500 1,000 1,500 2,000 2,500 3,000 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* Source: Ministry of Finance
  54. 54. Structure of declared social tax 2003- 2016 million € 0 1,000 2,000 3,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* 2014* 2015* 2016* Employers' payments to natural persons Fringe benefits State (according to social tax law §6) Business income of sole proprietors Source: Statistical Office of Estonia, Ministry of Finance
  55. 55. Indirect taxes
  56. 56. 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
  57. 57. Value-added tax (VAT)
  58. 58. Taxable person • Person whose taxable supply (excluding import) exceeds 16 000 EUR in a calendar year • Voluntary compliance possible for anyone, who carries out economic activity in Estonia VAT
  59. 59. 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 VAT
  60. 60. Tax rates • Standard rate is 20%. • Reduced rate is 9% (books, newspapers, medicines, accommodati on). • 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
  61. 61. 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. VAT
  62. 62. VAT revenue 1994-2016 (million EUR) million € 0 200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* Source: Statistical Office of Estonia, Ministry of Finance
  63. 63. Excise duties
  64. 64. Excise duties Excise duties are levied on: • Alcohol • Tobacco • Fuel • Electricity • Packaging Duty rates on alcohol, tobacco and energy products meet the EU minimum levels
  65. 65. Excise duty rates on alcohol Unit Excise duty rates 01.01.2013 EU minimum excise duty rates Wine and fermented beverage Hectolitre (up to 6 %): 34,97 EUR (> 6 %): 80,64 EUR 0 Beer 1 % alcohol in hectolitre 6 (yearly production up to 3000 hl): 3 EUR 1,87 EUR Intermedi- ate product Hectolitre 172,20 EUR 45 EUR Other alcohol Hectolitre of pure alcohol 1565 EUR 550 EUR
  66. 66. Excise duty rates on tobacco products Product Excise duty rates 01.01.2013 EU minimum excise duty rates CIGARETTES: 45 EUR 64 EUR per 1000 cigarettes, but not less than 57 % from weighted average price of cigarettes Specific rate (1000 cigarettes) Ad valorem rate (% of the retail selling price) 33 % Minimal amount of excise to pay (1000 cigarettes) 84,80 EUR Unlimited CIGARS (1000 cigars) 211 EUR 12 EUR or 5% from the retail selling price CIGARILLOS (1000 cigarillos) 211 EUR 12 EUR or 5% from the retail selling price SMOKING TOBACCO (1 kg ) 61 EUR 47 EUR or 43% from the retail selling price
  67. 67. Excise duty rates on motor fuels ENERGY PRODUCT Excise rates in Estonia 01.01.2013 EU minimum excise duty rate 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
  68. 68. Excise duty rates on heating fuels and electricity Energy product Excise rates in Estonia 01.01.2013 EU minimum excise duty rate 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 Petroleum 330,1 EUR/ 1000 l - - Natural gas 23,45 EUR/ 1000 m3 0,15 EUR/ GJ 0,3 EUR/ GJ Coal, coke and oil shale 0,3 EUR/ GJ 0,15 EUR/ GJ 0,3 EUR/ GJ Electricity 4,47 EUR/ MWh 0,5 EUR/ MWh 1 EUR/ MWh
  69. 69. Excise duty revenue 1994-2016 (million EUR) million € 0 100 200 300 400 500 600 700 800 900 1,000 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014* 2016* Alcohol Tobacco Fuel Source: Statistical Office of Estonia, Ministry of Finance
  70. 70. 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.
  71. 71. Packaging excise duty 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.
  72. 72. Gambling Tax
  73. 73. 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.
  74. 74. 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).
  75. 75. Plans for the future
  76. 76. 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 • Broadening the tax base and reducing tax incentives • Improving tax administration
  77. 77. Background information
  78. 78. Average Economic Growth in 2001–2011 -7 -5 -3 -1 1 3 5 7 lt sk lv ee ro pl bg cs lu cy si ie se hu es fi at uk mt be eu nl gr ea fr de dk pt it Keskmine majanduskasv 2001-2011 Majanduskasv 2011
  79. 79. Estonian real convergence with the EU 36 38 42 42 42 45 46 50 55 57 62 66 70 69 63 63 67 42 50 51 54 57 57 61 61 62 63 65 69 73 77 77 76 78 30 35 40 45 50 55 60 65 70 75 80 1995 1997 1999 2001 2003 2005 2007 2009 2011 % of EU27 GDP per capita in PPS Comparative price level Labour productivity per person employed
  80. 80. Labour market goals in Lisbon Strategy 70.0 60.0 50.0 61.0 60.6 36.1 17.3 64.1 58.2 32.2 9.7 0 10 20 30 40 50 60 70 Employment rate (15-64) Employment rate among women Employment rate among the elderly Unemployment rate Goal of Lisbon strategy Estonia in 2010 EU27 in 2010
  81. 81. Growth expectations GDP growth, % Consumer price index, % Current account, % of GDP 2012 2013 2012 2013 2012 2013 IMF 2.4 3.5 4.4 3.2 0.7 -0.1 Bank of Estonia 2.9 3.0 4.3* 3.6* -1.1 -2.1 Ministry of Finance (August 2012) 2.2 3.0 3.9 3.5 0.3 0.4 *HICP for BoE
  82. 82. General Government budgetary balance 2003-2016 1.8 1.6 1.6 2.4 2.4 -3.0 -2.0 0.2 1.1 -1.2 -0.7 0.1 0.4 1.3 -4 -2 0 2 4 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012* 2013* 2014* 2015* 2016* % of GDP Central Government Local Government Social Security General Government Source: Statistical Office of Estonia, Ministry of Finance
  83. 83. General Government tax burden 1995- 2016 (% of GDP) 36.3 34.3 34.3 34.0 32.5 31.0 30.2 31.0 30.8 30.6 30.6 30.7 31.4 31.9 35.9 34.1 32.8 33.2 32.6 32.2 32.0 32.0 0.0 10.0 20.0 30.0 40.0 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013* 2015* Direct taxes Indirect taxes Social security contributions Tax burden
  84. 84. General Government debt in 2011 (% of GDP) 6.1 82.5 0 20 40 60 80 100 120 140 160 180 Estonia Bulgaria Luxembourg Romania Sweden Lithuania CzechRepublic Latvia Slovakia Denmark Slovenia Finland Poland Netherlands Spain Malta Cyprus Austria Germany Hungary EU-27 UnitedKingdom France Euroarea Belgium Ireland Portugal Italy Greece
  85. 85. Tax rate on low wage earners: Tax wedge on labour cost 32 34 36 38 40 42 44 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 % Estonia Latvia Lithuania EU 27

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