MP Neinar Seli, who is lobbying for the processed-food exporters, is drawing up legislative amendments which would restore a system of VAT repayment which until Jan. 1 exporters used to reduce the amount of import duties they paid to Russia when exporting to that country.
Seli said fish processor Viru Kalatoostus had threatened to dismiss 500 employees, another - Maseko - 1,000 employees, Haapsalu Kalatoostus 250 employees and Makrill 70 employees.
Until Jan. 1 processed-food exporters could reclaim VAT charges they incurred in purchasing fish or other raw materials as soon as their products entered Estonia's free economic zones, which act as staging posts for goods entering and leaving the country.
Once inside the zones the processed food for export would be resold to front companies at low prices, thus lowering the duty that could be levied by Russia's customs authorities.
But now VAT can only be reclaimed when products actually leave the country so if processed-food exporters want to claim all the VAT they are owed, products must leave Estonia bearing the price agreed with the Russian purchaser, rather than a lower price fixed with a middle man.
Seli defended such methods, saying they were a response to a recent decision by Russia to double customs duties on Estonian imports. According to the Estonian Fishery Association two-thirds of Estonian fish processors were accustomed to exporting through free trade zones and the present system is incurring the industry losses of 10 million kroons ($571,400) per day.
The association sent letters to President Arnold Ruutel and to outgoing Prime Minister Mart Laar on Jan. 18 pleading for the restoration of the old system.
But Marek Uuskula, assistant director of the Ministry of Finance's tax department, defended the new system. Free economic zones were created to streamline procedures for importers, rather than to benefit exporters, he said.
"Why should the exporters store their goods in the free zone if they know who they've produced them for?" he asked.
Agu Laanemets, director of Viru Kalatoostus, which sells most of its production in Russia and Ukraine, said: "My only reproach to the ministry is that the changes happened too soon. No one noticed the amendments in the VAT act after they were made in June last year. It's very difficult to change the well developed logistics system so fast. The customs authorities should start checking certain transactions if they know tax fraud is occurring."
Jaan Bender, board member of veneer exporter Balti Spoon, said the company had now resorted to exporting its products to Germany from Latvia, with which Estonia has a free trade agreement and where VAT can be claimed as soon as goods arrive in the country's free economic zones.
"It is a big mess," said Bender. " The amendments were not hidden anywhere, but we couldn't see them."
He estimated the cost of paper work in the Latvian free trade zone used by his company to be 6.2 times higher than in the Estonian free economic zone it used formerly. Balti Spoon will lose 1 million kroons per year as a result, he said.
"Several people will lose jobs at the Estonian free trade zones and at the transport companies," he added.
"The arguments of the ministry are not convincing. It makes me wonder whose side they are on - Russia's or Estonia's? Exports are a holy thing which should be handled carefully."
There are three free economic zones in Estonia: Muuga in northwestern Estonia, Sillamae in the northeast and Valga in the southeast. The zones are expected to remain in place until at least 2011.
Latvia has four such zones.
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