The legal address and head office of the Google internet platform is in California, the European representation in Ireland and a subsidiary in the Netherlands. The head office responsible for the activities of Facebook in Europe is also located in Dublin, Ireland. Advertising turnover of Facebook increased 59 percent in the third quarter of this year compared with 2015; that of Google 18 percent.
A foreign company’s revenue is presently taxed in Estonia only in case and to the extent of the company’s business activities taking place in Estonia. According to the Tax and Customs Board, the accessibility of a website in Estonia does not serve as ground for tax liability.
“Regarding income tax these companies would become liable to taxation in Estonia only in case of permanent operating base and as far as we know these enterprises do not have it,” explained Mailin Aasmäe, spokesperson for the Tax and Customs Board.
According to the Board, firms selling goods or providing services in Estonia have to consider the Estonian tax laws. “Taxation is also influenced by international agreements against double taxation, on tax evasion and other foreign agreements,” the Board pointed out.
In case of an agreement against double taxation, a foreign company’s income from services provided in Estonia is taxed only in case and to the extent of a foreign subject providing services in Estonia continuously, via a definite location of business or representatives empowered to conclude agreements.
Since the laws currently in force in Estonia do not permit the exacting of income tax from these huge corporations, their earnings move out of the country tax-free and in ever-increasing amounts.
A study carried out by Kantar Emor shows that the larger service providers moved 5.1 million euros worth of advertising income put of Estonia in 2015, a larger sum that the total income of Postimees from online advertisements in 2015.
According to Allan Sombri, head of online advertising of Postimees, the Kantar Emor figures are too conservative. In Sombri’s estimation, the actual turnover moving out of Estonia via the advertisements mediators is even higher and amounts to 8-10 million euros.
It should be pointed out that the estimated online advertising turnover of local media channels for 2016 is 12.8 million euros. According to Kantar Emor, the figures show that money is flowing out of Estonia’s Internet ad market at a faster rate than the growth of turnover of local media channels.
Hanno Kindel, the Estonian head of the media agency chain Omnicon Media Group, admits the problem and states that the volumes of Facebook, Google and Youtube are increasing at a shocking rate. “The volumes went up years ago, but the turnover increase curves of this year really give food for thought. A certain part of digital marketing could be carried out purely by using these giants, meaning that 100 percent of the money earned, even including taxes, would move out of Estonia,” Kindel said.
In his opinion Estonia should not remain passive. “Obviously it would be fair to impose equal terms of taxation on all market players. The European Union or more precisely some member countries have made some moves in that direction,” he said.
The BBC announced in March that while Facebook used to direct its income earned in the UK to its Irish unit, it will begin to pay taxes on major clients’ advertising turnover in the UK.
The British government punished the earlier tax evasions by imposing a special 25-percent tax rate to concern all enterprises attempting to use various schemes for paying taxes in third countries on income earned in the UK.
When Facebook was inquired about the changing tax situation in Europe, the enterprise provided a laconic answer by stating that all taxes are paid in accidence with the local laws.
The Tax Board is powerless
In the opinion of Riigikogu Finance Committee member Aivar Sõerd, digital economy has settled down in the local market a long time ago. Google and Facebook are active in the Estonian advertising market and earn income on ads bought by local clients.
Thus they are competing in the local advertising market, but remain outside the tax Board’s grasp, Sõerd said. “The transnational enterprises of new economy have tax planning schemes developed by top lawyers, which our Tax Board is clearly incapable of untangling”, Sõerd commented the situation.
In his opinion this is not a priority for the Ministry of Finance and there have been no serious discussions on the subject. “New car taxes or sweetener taxes, essentially last century issues, are of higher priority,” he said.
The Ministry of Finance opinion of the possibility of taxation in the future remains unknown for the time being since the ministry failed to provide an answer within a week, despite repeated inquiries.
According to Sõerd, Spain, France and Germany have developed “rules for taxation of Google”. He added that the OECD has also been active for some time developing the taxation rules of digital economy and sharing its experience with member countries.
“But the rules of taxation in force in Estonia have remained obsolete and this subject should naturally be discussed exhaustively and in detail,” Sõerd said.