Editorial: the timely tax talk

Photo: Urmas Nemvalts

There are four bigger banks in Estonia: Swedbank, SEB, Danske Bank, and Nordea. In 2010–2012, the Golden Quartet made €1bn plus of net profit, between the four. A billion euros is very big money. To compare: this year’s state budget – upholding entire Estonian state – is €8bn. Might be more, but that’s what we have. What we do not have, even Death can’t take, to say nothing of the Taxman.

Turns out, however – there is more. As revealed by Tax Board papers, with the past years’ bumper profits, the banks have not paid a cent of corporate tax. Pursuant to local law, enterprises have no such obligation, if they don’t take out dividends. And the banks have been wise enough not to pay dividends. So, in eyes of the law, all is OK. The profit is ever collecting into a closed pond, not a drop trickling into the overall money flow of the state budget.

The problem is nothing new. Far from it: it dates back to the times when enterprises obtained income tax exemption. Which prescribed that in case profits go into investment, the state shall support development of enterprises by not claiming income tax from the sum invested. Should a company, however, pay out the profit, then it undergoes taxation.

Entrepreneurs being no fools, they found a way to get the profit without paying taxes: the profit was loaned to their very selves. The practice was not limited to small companies; even the big and the honourable, some even foreign-owned, did that.

How to solve the problem? Former finance minister Aivar Sõerd found a solution in freewill income tax. The idea is not new, neither is it popular. In 2003, while Reform Party chairman, Siim Kallas suggested that companies spend a tenth of their profit on research and development. Do we need to add, that the idea proved not too popular? 

Social responsibility, quite an argument in Europe, is not taken too seriously in Estonia. Last year, the cafe chain Starbucks – not a lover of paying income tax – came under criticism by British Prime Minister David Cameron. The result? The coffee lovers «disloved» the chain, letting social media followers know of decision to sip coffee, from now on, from cups bearing other logos. Out of free will, then, Starbucks did pay – in advance, just to be sure. Client dropping hazard outweighed all else.

Despite nobility of intent, the idea to propose local banks payment of voluntary corporate tax does sound a bit dubious. Should a bank chief say he will volunteer to pay taxes, he’d probably be sacked.

Even so, idea by Mr Sõerd may have a couple of good points. Firstly: it points glances towards big company profits and the fraction that is paid into state budget (companies lead, 1:0). And, secondly: it may perhaps again raise the issue – is all okay, really, with our tax system?