Estonian SMEs: Tax changes must be postponed until economic growth cycle arrives

TALLINN - The Estonian Association of Small and Medium-Sized Enterprises (EVEA) is of the opinion that the tax hike planned by the government should be postponed until a thorough impact analysis has been carried out by the state with regard to increasing each tax type, and that justified tax hikes should be planned for the start of an economic growth cycle.

The SMEs also oppose the government's plan to increase the VAT rate for accommodation establishments as well as raise the maximum VAT obligation to 100,000 euros, the association said. 

According to the results of a flash survey among EVEA members, the planned package of tax hikes will not lead to budget balance, according to the entrepreneurs. Concerns about the incoming tax changes are greatest among entrepreneurs with annual revenues from 40,000 to 500,000 euros, the majority of whom assess the negative impact as either large or critical. 

EVEA President Ille Nakurt-Murumaa said that the analysis in the explanatory memoranda of the tax hike bills is superficial and inadequate and fails to take into consideration the impact of the package on consumers' purchasing power, the likely decline in which will negatively affect businesses' performance and the Estonian economy as a whole. 

According to the latest economic forecast of the Estonian central bank, the overall volume of the economy this year will be 0.6 percent smaller than in 2022. The central bank forecasts economic growth to be close to 3 percent for the next few years.

"This growth forecast has been compiled based on the assumption that the confidence of companies and households will improve and this should create better conditions for making new investments. However, the survey conducted among EVEA members confirmed that as a result of the tax changes, the confidence of entrepreneurs will significantly deteriorate. Of the small and medium-sized enterprises that participated in the survey, 25 percent said that the tax changes planned by the coalition agreement will affect their company critically, and 36 percent estimated a large impact," Nakurt-Murumaa said.

"It is clear that higher taxation of consumption directly hinders economic growth, and it must not be done in the current situation, when companies have yet to recover from various crises," the president of EVEA added.

According to EVEA, the competitiveness of Estonian companies is deteriorating compared to the rest of Europe, both in terms of exports and tourism. The association predicts that the increase in taxes will lead to a snowball effect in the cost of living and a decrease in consumption, and the turnover of companies will fall, which will turn the economy to a decline instead of an expected growth.

EVEA also pointed out that the planned increase in the VAT rate for accommodation establishments from 9 percent to 22 percent and the plan to raise the minimum wage as pressured by the state, at a time when it is not possible to increase the productivity of companies, particularly severely affect small and medium-sized enterprises and harm regional development.