Estonians free to divert money offshore

TALLINN - Although a lot of changes have been made to the Estonian income tax law, pumping profits into offshore companies to avoid taxes is still very simple for Estonian companies. According to specialists, every third Estonian company is dealing with offshore business, a problem that is also widespread in Latvia.

According to Enn Heinsoo, director at Suntiger Five International (SFI) Estonia, offshore companies are most popular among medium-sized companies. SFI is an international company that sells offshore companies.

He said that offshore business is most common among Estonian trade and shipping companies.

The Estonian Tax Board refused to comment on the matter, citing a lack of information and unwillingness to expose confidential information.

Estonia's Tax Board, unlike the ones in Lithuania and Latvia, distinguishes territories with three kinds of taxation systems. There is a "white list" of 28 countries, which belong to the European Union or have signed a double taxation agreement with Estonia. There is also a "black list", which is twice as long and contains countries with a low or no income tax. The Estonian Tax Board taxes all transactions with these countries with a 26 percent income tax.

Between these two categories there is the "gray list", where businesses have to prove to the tax board that money has not been sent to an offshore company and the company pays at least a 17 percent income tax to the local government.

In Lithuania and Latvia it is much simpler. Countries that are not blacklisted are automatically considered to be clean and there are no misunderstandings in terms of taxation. Lithuania's and Latvia's black lists are almost as long as Estonia's.

In the case of "gray" companies it is the task of the Estonian Tax Board to find out whether the Estonian company is pumping money out through the tax-free region or not. In many Western countries the tax board commands businesses to prove their innocence.

If an Estonian company buys a service, lends money, buys shares or receives revenue from a company located in the so-called "black" country, it is required to pay 26 percent income tax to the Estonian. These financial arrangements are the most common ways of money laundering, said Heinsoo.

SFI is not dealing with "black list" countries directly but is using double schemes through "white" countries that are difficult for the tax board to track. The prices of offshore companies range from $750 to $4,000.

According to Heinsoo, Estonian businesses cannot register offshore companies as easily as they did before the new income tax law came into force in January 2000.

"In the past it was very easy to buy an offshore company in the Bahamas and buy non-existent market research for $6,000 from it," said Heinsoo. "Many companies, on the other hand, 'lent' big sums of money to Bahamas companies, which went bankrupt a little later.

"It does not work that primitively today. The tax board has taken fierce steps to stop it. The schemes have become more complicated and it is difficult for companies to deal with it on their own."

The most common way of hiding money is buying shares from a tax-free company, because the cost of the shares is fictitious and could be anything from $1,000 to $150,000, said Heinsoo.

Sometimes an Estonian company is really buying a service from a "black" country and it is very difficult to prove, said Heinsoo.

If a computer salesman is buying computer components from Hong Kong and has to make a prepayment, then he has to pay taxes for both countries. Heinsoo said that it is possible to get the paid taxes back but the law does not make it easy.

Heinsoo also regrets that Switzerland is on the "black list" because investors buying shares of Swiss banks or pharmaceuticals have to pay an additional 35 percent income tax.

"And for the Estonian pension funds it is very difficult to cooperate with international funds, because most invest in successful funds that are registered in low-tax regions," Heinsoo added.