Reform Party defends companies’ income tax exemption

Photo: Laura Oks

In spite of optimism within prime minister’s Reform Party, a growing number of people think it’s time Estonia review its tax system.

According to Reform Party’s tax experts, the companies’ exemption works well and needs no restructuring. However, the rise of indirect taxes is to be continued.

The latest critical voice to be sounded was that of Urmas Varblane, a professor of international enterprise at University of Tartu and member of Estonian central bank’s council.

Mr Varblane wrote in Postimees, last week: «Such logic of exemption from income tax, tied to investments into buildings and structures, serves to enhance an economy at a certain period of time, when initial investments are needed.»

Even before, economists have pointed at their research and claimed that companies’ tax exemption was effective only at a time when the state desperately needed to lure foreign investments. The exemption is said to be a reason why the Estonian tax burden is tilted: labour force is taxed more heavily than assets.

According to minister of finance Jürgen Ligi, criticism by Mr Varblane is contradictory and faulty.

«On the one hand it is stated that the system is losing its shine, as the companies’ tax load is no longer small as compared to other countries. With that, we have to agree, and that, on the one hand, also serves as an answer to the opposition which desires to increase the load. On the other hand, this is a reason to lower the income tax rate and a reminder of the condition of the tax-free minimum,» commented Mr Ligi.

Mr Ligi’s latest initiative is increasing the income-tax-free minimum. Lowering the now 21 per cent income tax rate to 20 should be accomplished in 2015. The timing of tax-free minimum’s rise is not known; it could also come in 2015, or maybe later.

«This I know, however, that Mr Varblane wants the state to simply collect more taxes. Be it known, that then the shine will quickly fade, and it is a deeply flawed choice to collect more [taxes] at the expense of investments. Also, it would by no means replace the labour taxes, the roll of which in the budget is many times larger,» said the minister.

According to Mr Ligi, the Estonian tax system frees the hands of companies to direct their cash flows: into investments, to hire labour force or to pay dividends. That also answers the claim of Mr Varblane, who said that «the systems favours pouring loads of money into machinery and structures, meant for employees with very low salaries».