Estonian Taxes And Tax Structure 2011

1

Estonian Taxes and Tax Structure

Tax Policy DepartmentMinistry of Finance

Revised in 2011

2

General Data

Population (01.01.2011) 1,340,194

Total area 45,227 km2

Average salary (2010) 792 EUR

Currency EUR

GDP (2010) 14,305 mill EUR

Economic growth (forecast for 2011) 7.5%

(forecast for 2012) 3.0%

GDP per capita (2010) 10,674 EUR

Inflation (forecast for 2011) 4.9%

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

■ Plans for the future

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

Taxation Act

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

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

8

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.

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

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

Taxation Act

Requirements 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.

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

■ 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)

Main tax rates

14

Tax Structure

15

0

5

10

15

20

25

30

35

40

2000 2002 2004 2006 2008 2010 2012* 2014*

Direct taxes Indirect taxes Social security contributions

Structure of tax burden (% of GDP)

Source: Statistical Office of Estonia, Ministry of Finance

16

Structure of general government tax revenue


0%

20%

40%

60%

80%

100%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011*

2012*

2013*

2014*

2015*

Social contributions VAT Personal income taxExice duties Corporate income tax Other state taxesLocal taxes

17

Tax burden ( % of GDP)


30,7

30,6

30,6

31,731,431,0 30,8

35,7

34,2

32,7 32,632,532,1

31,931,0

30,2

29

30

31

32

33

34

35

36

37

2000 2002 2004 2006 2008 2010 2012* 2014*

18

State Budget Tax Revenue 2010

Total tax revenue 4 045,6 million EUR Total revenue 5 516,1 million EUR

4,7% 4,8%

30,8%

16,5%

41,9%

0,6%

0,1%0,6%

Personal income tax Corporate income tax VATExcise duties Heavy vechile tax Customs dutySocial tax Gambling tax

Source: Ministry of Finance

19

Tax Revenue 2010, million € (collected)

* - The amount received by the state + local governments

State taxes 4 045,6 Direct taxes 2 898,0

Personal income tax* 776,4 Corporate income tax 193,8 Social tax 1 697,6 Unemployment insurance 178,9 Land tax 51,3 Indirect taxes 1 962,4

VAT 1 248,2 Excise duties 666,3 Heavy vehicle tax 3,5 Customs tax 23,8 Gambling tax 20,6 Local taxes 14,2

Source: Ministry of Finance

20

Direct taxes

21

■ Personal income tax■ Corporate income tax■ Social tax■ Land tax■ Heavy goods vehicle tax■ Gambling tax

Direct taxes

22

Reasons for introducing flat rate in Estonia

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 January 1st 1994.

24

The outcome…

25

Personal income tax revenue 1994-2015million €

0

200

400

600

800

1 000

1 200

1 400

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* 2014*

Local government StateSource: Statistical Office of Estonia, Ministry of Finance

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

261,0266,3

256,3

193,8207,0

220,6207,0

216,0227,0

* - includes revenue under the prior Income Tax Act (taxable period 1999)

million €

27

The outcome

■ The same tax rate both 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.

28

Personal Income Tax

29

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.

30

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%

31

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

32

20

21

26

24

2322

51

3219

144128

109

90

64

18

20

22

24

26

28

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

%

0

20

40

60

80

100

120

140

160

Income tax rate (left scale) Monthly tax threshold (€, right scale)

Income tax reduction

33

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.

34

Personal income tax

For non-resident natural persons■ Period of taxation is a calendar year■ Tax rates: 21% and 10%

■ Estonia has 47 treaties for the avoidance of double taxation (income tax and capital taxes) in force

35

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

36

Personal income taxAvoidance of double taxation

Natural persons

■ Exemption method for foreign dividends and certain salary income

■ Credit method for all other types of foreign income

37

Corporate Income Tax

38

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

39


Eliminationof technical

shortcomings

Additionalfunds availablefor investment

Stricter regulationof transfer

pricing

AccelerationAccelerationof economicof economic

growthgrowthIntroduction of the CFC

rules

Transparencyand exchangeof information

40


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

41

Tax rate 26 % (on

gross profit)


Income tax

26 EEK

Dividend payment74 EEK

Profit earned 100 EEK

Time

The taxation of profit until 1999

42


Income tax

26 EEK

Dividend payment74 EEK

Profit earned 100 EEK

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; see next slide

43


■ Tax rate in 2011: 21% (21/79 of the net

amount)

■ Period of taxation: a calendar month

44

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)

45


+ 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

14

00

EU

R p

ote

nti

all

y ta

xab

le

incom

e

Tax l

iab

ilit

y d

efe

rred

Profit earned in

2009

200 EUR +

Profit earned on

2010

1000 EURDividend

/ liquidatio

n 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

46


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

47


Avoidance of double taxation

Companies and non-resident’s PEs

■ Exemption method for qualified (threshold 10%) profit distributionsthe 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

48

Structure of declared corporate income tax 2003-2015

million €

0

100

200

300

2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2013* 2014* 2015*

Payments to non-resident legal personsNon-business expensesCharitable gifts and donations exceeding non-taxable amountFringe benfitsDistributed profit (dividends paid out)


49

Social Tax

50

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

51

Social tax

Period of taxation

■ Calendar month for wage income■ Calendar year for business income of sole

proprietors

52

Social tax

■ Tax rate is 33 % of the taxable amount

■ Social tax payable is personificated and in making pension payments will be taken into account.

53

■ 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%

54

Social tax revenue 1994-2015million €

0

500

1 000

1 500

2 000

2 500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* 2014*Source: Ministry

of Finance

55

Structure of declared social tax 2003-2015million €

0

1 000

2 000

3 000

2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012* 2013* 2014* 2015*

Employers' payments to natural persons Fringe benefits

State (according to social tax law §6) Business income of sole proprietors


56

Indirect taxes

Ministry of Finance of Estonia

57

■ Value added tax■ Alcohol excise duty■ Tobacco excise duty■ Energy products excise duty■ Packaging excise duty (budget revenues

insignificant) ■ Gambling Tax

Indirect taxes

58

Value-added Tax (VAT)

59

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

60

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

61

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

62

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

63

VAT revenue 1994-2015million €

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*Source: Statistical Office of Estonia, Ministry of Finance

64

Excise duties

65

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

66

Excise duty rates on alcohol 01.01.2011

Unit

Excise duty rates in euros

EU minimum excise duty

rates Wine and fermented beverage

Hectolitre

(up to 6 %): 31,70

(> 6 %): 73,11

0

Beer

1 % alcohol in

hectolitre

5,43

(yearly production up to 3000 hl): 2,715

1,87

Intermedi-ate product

Hectolitre

156,20

45

Other alcohol

Hectolitre of pure alcohol

1418

550

67

Excise duty rates on tobacco products 01.01.2011

Product Excise duty

rates in euros EU minimum

excise duty rates

CIGARETTES: 38,35

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 %

CIGARS (1000 cigars)

191,73

12 EUR or 5% from the retail selling price

CIGARILLOS (1000 cigarillos)

191,73


SMOKING TOBACCO (1 kg )

55,79


68

ENERGY PRODUCTS: national excise duty rates on MOTOR FUELS and the EU minimum excise levels

ENERGY PRODUCT

Excise rates in Estonia 01.01.2011

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

69

National excise duty rates applicable to heating fuels and electricity and the EU minimum excise levels

Energy product

Excise rates in Estonia

01.01.2011

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

Petroleum 330,1 EUR/ 1000 l

- -

Natural gas

23,45 EUR/ 1000 m3

0,15 EUR/ GJ 0,3 EUR/ GJ

Coal and coke

0,3 EUR/ GJ 0,15 EUR/ GJ 0,3 EUR/ GJ

Electricity 4,47 EUR/ MWh

0,5 EUR/ MWh

1 EUR/ MWh

70

Excise duty revenue 1994-2015million €

0100200300400500600700800900

1 000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012* 2014*

Alcohol Tobacco Fuel


71

Packaging excise duty

72


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;

73


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.

74

Gambling Tax

75

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.

76

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).

77

Plans for the future

78

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

79

Plans for the future

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

80

Thank you!

81

Background information

82

Average Economic Growth in 1996–2010

2,3

-4

-2

0

2

4

6

8

EE IE LT LV PL SK LU SI CY

CZ FI ES

BG

RO SE GR US

UK

HU

NL

AT

BE PT EU FR EA

MT

DK

DE IT JP

1996–2010 2010

83

Estonian real convergence with the EU

64 6463 6569

7378 77 75

69

70

4542 43

5550

4642

36 38

5762

66

42

50 5154 57 57

61 6162

3035404550556065707580

1995199619971998199920002001200220032004200520062007200820092010

% of EU27

GDP per capita in PPSComparative price levelLabour productivity per person employed

84

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 rateamong women

Employment rateamong the elderly

Unemployment rate

Goal of Lisbon strategy Estonia in 2010 EU27 in 2010

85

Growth expectations

GDP growth, %

Consumer price index, %

Current account, % of GDP

2011 2012 2011 2012 2011 2012 IMF 6.5 4.0 5.1 3.5 2.4 2.3 European Commission 4.9 4.0 4.7 2.8 1.8 0.1 Bank of Estonia 6.3 4.2 4.7 2.5 1.7 1.0 Estonian Institute of Economic Research 5.5 – 4.5 – - – Ministry of Finance (Sept 2011) 7.0 3.0 4.9 2.8 3.3 2.0

86

General Government budgetary balance 2004-2015

1,00,5

-0,1

-2,1

0,20,3

-2,0-2,9

2,42,5

1,61,61,7

-4

-2

0

2

4

2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012*2013* 2014* 2015*

% of GDP

Central Government Local Government Social Security General Government


87

General Government tax burden 1995-2015 (% of GDP)

34,3 34,3 34,032,5

31,0 30,2 31,0 30,8 30,6 30,6 30,7 31,4 31,7

35,734,2

32,7 32,6 32,5 32,1 31,9

36,3

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

88

General Government debt in 2010 (% of GDP)

80,2

6,70

20406080

100120140160

Esto

nia

Bulga

ria

Luxe

mbo

urg

Rom

ania

Czec

h Re

publ

ic

Lith

uani

a

Slove

nia

Swed

en

Slova

kia

Den

mar

k

Latv

ia

Finl

and

Polan

d

Spain

Cypr

us

Net

herla

nds

Malt

a

Austr

ia

Unite

d K

ingd

om EU-2

7

Hun

gary

Fran

ce

Ger

man

y

Euro

area

Portu

gal

Irelan

d

Belgi

um Italy

Gre

ece

89

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

33

34

35

36

37

38

39

40

41

42

43

44

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Estonia Latvia Lithuania EU 27

Estonian Taxes And Tax Structure 2011

Economy & Finance

Transcript of Estonian Taxes And Tax Structure 2011