TALLINN - Prime Minister Andrus Ansip spoke out in defense of the country's tax system, saying it was just as effective as in other EU member states. In an interview with Estonian Radio on Feb. 10, Ansip said that the exemption on reinvested profits and a reduction of the personal income tax rate help the Baltic state maintain a favorable economic environment and ensure better collection of taxes.
By way of example, Ansip said that Estonia was able to collect the equivalent of nearly 2 percent of GDP in corporate income tax, while Slovakia, which has a 19 percent corporate tax rate, collected 2.15 percent of GDP and Germany musters less than a half percent even though the tax rate is nearly 40 percent in some areas.
"From 0.6 to 0.9 percent of Germany's GDP is spent on tax incentives and exceptions," the prime minister said.
German officials have been some of the most vocal critics of Estonia's tax-exemption on reinvested profits, referring to it as tax dumping. There have been calls in Brussels for a single EU-wide system, which many member states large and small 's e.g., England and Estonia 's have resisted.
In addition, Ansip is facing criticism at home for proposed tax cuts, with the Social Democratic opposition calling for a vote of no-confidence in the government.
During an Estonian Chamber of Commerce and Industry event in January, Ansip suggested that in 2011 the uniform personal income tax rate could be 18 percent. Speaking on Feb. 10, he added that lowering personal income tax wouldn't mean that the tax-free part of personal income would be increased.
This year the personal income tax rate is 23 percent, and monthly non-taxable income is 2,000 kroons (128 euros).
Ansip, who chairs the Reform Party, said that although the Estonian economy is growing rapidly and annual GDP growth rates of close to 10 percent allow a budget increase of 15 percent a year, the economic environment can never be viewed as ideal.
"We have to struggle and compete with other countries for foreign investment all the time, because other countries are catching up on us in terms of attractiveness of the economic environment," he said.
Meanwhile, a Bank of Estonia official said last week that real estate accounted for almost one-fourth of growth in the Estonian economy. "Despite very good export growth, the economic growth last year was driven more by domestic demand than by export, partially as a result of imports that grew rapidly on the back of strong domestic demand," Ilmar Lepik, head of the Bank of Estonia's policy department, said.
Lepik added that one of the main factors behind domestic demand was the real estate complex, which includes property rent as well as business activities and added value created in the construction and finance sectors.
