The tax system to enter into force in 2018 is everything but simple. The only two elements the ordinary person still grasps are the recent 20 percent income tax rate, and the fact the current €180 minimum income exempt of tax will be hiked to €500.
From there, things take a turn for the complicated and become a challenge for tax board officials, accountants, and of course taxpayers themselves, used to the current system where logging into the e-tax system and pressing a few buttons is all it takes to file one's tax return.
And for good reason. «The law provides 500 rates of tax-free income a month, which comes to 6,000 a year. Income exempt from tax will fall by €1 for every €1.8 earned,» said head of the taxes department of the Tax and Customs Board (MTA) Evelyn Liivamägi.
What this means in other words is that Estonia will switch to a 6,000-rate tax system where all manner of distinctness in income will only complicate things further.
Effect of nonrecurring income
We picked three realistic situations an unskilled worked living in a rural area, a state officials making €1,200 a month, and a person working two jobs might find themselves in to see how their income and the taxes they pay would change in the new system.
Let it also be said that the 2018 system prescribes €500 as the part of income exempt from tax for people making €1,200 a month. The tax-free sum will fall to €499 for people making €1,202 and reach zero at €2,100 a month. Tax accounting will cover a person's salary and all other items of income and expenditure that will have a considerable effect on the deduction.
As it turned out, situations where our unskilled worker who makes €500 a month manages to sell a piece of his forest land, the official gets an annual bonus of €2,500, and the person working two jobs gets a fixed salary in one and a different amount every month in the other, would leave the former worst off in the new system.
Even though the minimum income hike will leave them with an additional €725 in 2018, they will have to pay additional income tax in the sum of €1,200 on sale of forest in 2019.
Postimees' calculations suggest the state official will gain €362 a year, while they will have to pay the state €278 in additional income tax. The person working two jobs will gain €634 and have to pay €467 in income tax.
System to be developed
While Postimees had to walk quite a long road for these calculations – we had the tax board double check our maths just to be sure (differences were minute) – it is clear the topic of tax changes remains unclear and in early stages.
«We are planning to invite the Association of Estonian Accountants and representatives of accounting software developers for a meeting to discuss accounting for taxation purposes in the new system in cooperation with the finance ministry,» Liivamägi said.
He expressed hope a system would be agreed upon inside March to leave developers with enough time to prepare changes in accounting software before 2018.
«MTA keeps up with the times, develops its systems to help people remember their obligations, but will not deliver them from corresponding responsibility altogether,» chief specialist of the agency's public relations department Maria Murakas said. She added that e-declaration will be as simple in the future as it is today since the system will handle retroactive calculations.
In order to escape the unpleasant obligation of making additional payments that might concern those making more than €1,200 a month, Murakas recommended waiving monthly accounting of tax-free income. «Waiving monthly income exempt from tax could result in a positive surprise in the form of a tax return,» she said.
Executive manager of the Estonian Small and Medium Business Association (EVEA) Raivo Altmets does not fully agree.
«We need to keep in mind that regularly waiving the exemption in full is also disadvantageous for the taxpayer as the money will remain available to the state and not the taxpayer,» he said. Altments added that the state does not have to pay interest on using the money.
Altments couldn't say whether this type of income tax accounting would have a direct effect on the economy. «I dare say it wouldn't, or the effect would be trifling.»
The executive manager said there will be salary advance pressure on higher salaries. «Seeing as high-paid people stand to lose the most from tax changes in a situation where they make the key decisions in companies,» he explained.
Altmets said it cannot be ruled out salary advance below the average salary level will slow down. «Which is rather good for entrepreneurs, considering wages have grown faster than productivity in recent years.»
It could also contribute to people making less than €1,200 a month being trapped on that level of income, which is something critics of the government's tax reform have repeatedly pointed out.