TALLINN – The Ministry of Finance estimates that Estonia's accession to the global minimum tax will not lead to a mass exodus of large companies from the country.
However, the possibility cannot be ruled out that companies for whom the Estonian tax system has been particularly important may look for alternatives.
The Ministry of Finance is of the opinion that the majority of investors have expanded to Estonia due to a combination of several factors, in which, in addition to taxes, political stability, low level of red-tape, availability of business services and a skilled workforce also play a major role. Therefore, the ministry considers that a minor change in only one factor will not lead to a mass exodus of investors.
At the same time, the ministry recognizes that a minimum tax can make the business environment somewhat less advantageous for foreign investors. Therefore, Estonia initially opposed the minimum tax.
Estonia's current income tax system encourages reinvestment of profits, as businesses only become liable to tax when they start to distribute profits. For many foreign investors, Estonia's simple and effective income tax system has been one of the positive factors in choosing where to invest, the ministry said.
According to the ministry, Estonia eventually agreed to the proposal for a minimum tax, as during the negotiations an agreement was reached on exceptions for Estonia that will ensure more flexibility for companies operating here in terms of taxation.
Besides, an exception was granted that will apply to all business operators smaller in size than a certain limit, which is of major importance to the companies here, given the size of the Estonian market. In addition, a situation arose in which Estonian business operators could have been worse off if Estonia remained outside the agreement than if it joined the deal. By joining the agreement, this risk was eliminated, according to the Ministry of Finance.
The minimum tax will apply to internationally operating groups with sales revenue of at least 750 million euros per year. There are two or three such local groups in Estonia, along with approximately 300 subsidiaries of foreign groups with sales revenue upwards of that limit. Other companies are not subject to the tax.
Discussions on the minimum tax began in 2013 when the OECD launched an international package of measures against tax avoidance. Over the years, it developed into a much broader initiative, and on Oct. 8 this year a political statement of 136 countries on the international tax reform was approved, with Estonia joining.
The OECD-approved timetable foresees the implementation of the tax from 2023. Since countries have to adopt national laws to implement the tax and the European Union also needs to adopt a directive, it is realistic that the actual date of entry into force of the tax will be postponed.