Tax clouds gather over small farmers

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Photo: Aldo Luud / Õhtuleht

Among the herds of tax-changes in pipeline by the new government, they desire to chop income tax off several agricultural refunds paid to self-employed farmers.

According to Helir-Valdor Seeder (IRL), former agriculture minister and current finance committee member at Riigikogu, finance ministry – initiator of the bill – is illiterate in the field and none of their arguments hold a drop of water.

The general rule is: from EU support, income tax is not taken. Thus it has also been, up to now, with agricultural refunds. But self-employed farmers and enterprises do have to pay income tax on profits made i.e. the income put into pocket. Companies can reinvest tax free; the self-employed have the option of transferring refunds related to business to a special account, for investments. 

Sparks fly between producer and owner

Up to now, self-employed land-owners possessing some five-six percent of the land, in Estonia, have gotten the refunds to the last cent. Mostly, the plots of land are rather small; on these, they basically grow food for their own selves and thus they aren’t required to register as self-employed persons (the «FIE»). Some big farmers think this is unequal treatment. Last May, the Estonian Chamber of Agriculture and Commerce (EPKK) sent agricultural and finance ministries a letter. In it, EPKK claimed that the tax exemption for self-employed persons regarding agricultural refunds has led to a situation where land-owners desire to apply for single are payment and are not interested in renting the land out to active agricultural producers. Meanwhile: as a rental agreement is entered between land-owner and producer, the former will have to pay income tax on rental income.

«Increasingly, the current legal regulation is creating tensions between agricultural producers and land-owners,» thinks EPKK’s CEO Roomet Sõrmus, signatory to the letter.

To solve the problem, big farmers propose two alternatives: either bring agricultural refunds to self-employed persons under income tax, or exempt income received by the self-employed, by rental of agricultural land, from income tax.

Now, the very letter is being referred to in the explanation added to finance ministry bill, saying that non-taxation of refunds distorts the market. In the letter of explanation, the ministry claims that the spirit of tax exemptions has been social i.e. to not harm coping and subsistence of an individual. It is concluded, however, that due to the broad wording of the law, the exemption has spread to all kinds of sums which are refunded as support under whatever law. 

«With such support, tax exemption is often not essentially substantiated; especially when these are basically being paid as fees for some activity or to compensate for loss of profit (certain agricultural and environmental refunds),» reads the letter of explanation by finance ministry.

By taxing self-employed persons’ agricultural refunds, it is hoped to stuff state coffers by extra €1.5m a year.

The «EU mower» issue

It is beyond Mr Seeder why an amendment like this is desired.

«In the letter of explanation to the draft act, they refer to equal treatment being the goal; however, knowing the practical life, the opposite will happen,» says Mr Seeder.

According to former agriculture minister, that main problem is that self-employed persons cannot calculate costs off from income; thus, income tax would hit the entirety of refunds paid to them. Thereby, they would find themselves in an unequal situation.  

Finance ministry maintains that by the amendment, motivation will be cut for the «EU mowers» i.e. people not cultivating the land but simply pocketing EU benefits. But, according to Mr Seeder, it is actually intended to also tax dozens of refunds that can only go to active farmers.

On top of that, the IRL politician says the amendment would be no solution for the EU mower matter, as self-employed persons only own five-six percent of land.

«We are talking about five percent of land, but not of the 95 percent. At the moment, it may be boldly claimed that when it comes to land in hands of owners and not personally used for production but rented out for production, a larger share of that is in the hands of companies and real estate firms. But for them, nothing changes with this law,» said Mr Seeder.

And on top of all that, Mr Seeder suspects that taxation of refunds is contrary to EU law which prescribes that refunds may not be used to fill member-state budget holes. Profits earned may indeed be taxed; even so, with self-employed persons who can’t subtract costs from income, the entire refund will come under tax. In high likelihood, once the law enters into force, some farmer will sue to European Court.

Discussed at committees

In commenting said contradictions, finance ministry remained tongue-tied and only said, via press secretary Mailin Aasmäe, that European rules do not ban taxation of agricultural refunds. In their reply, the ministry also copied the refund-taxation part of the letter of explanation. To the next inquiry, there also followed a curt reply that «if recipient of the refund has costs related to activity refunded, he may register as self-employed person (FIE) and subtract the costs».

Asked why these very refunds were chosen for taxation, the press secretary only said this was the governmental decision. 

Agriculture minister Ivari Padar (SDE, soc dems) said tax laws should touch everybody on equal basis – both in agriculture and other areas.

«That means that if agricultural refunds of self-employed persons are taxed, then that would have to be applied to benefits in all other fields,» he said.

If physical persons have costs related to business, Mr Padar also thinks it prudent to get registered as self-employed FIE, for instance.

«In that case I do not see inequality created between the two legal forms. With no business costs, then regarding taxation the current inequality will disappear where physical persons’ benefits aren’t taxed but the company ones are,» said the minister.

Mr Padar underlined, however, that taxation is only a topic with single area payment. «As the bill was being coordinated, we noted, for instance, that it is not relevant to tax benefits where the recipient thereof is essentially providing a public service, like benefits supporting climate and environment friendly practices, or benefits for young agricultural producers about to launch into agricultural activity,» he explained.

The bill is being discussed at Riigikogu committees, awaiting its second reading. 

Agricultural Registers and Information Board (PRIA) benefits to undergo taxation

1. Provision of consultation to agricultural producers and forest possessors

2. Provision of consultation regarding conformity to requirements and occupational health and safety

3. Improving economic value of forest

4. Restoration of damaged forests and prevention of forest fires

5. Less-favoured area/region support

6. Natura 2000 support for agricultural land

7. Support for organic farming

8. Support for keeping an animal of endangered breed

9. Support for maintenance of semi-natural biotic community

10. Animal grazing support

11. Non-productive investments

12. Natura 2000 support for private forest land

13. Leader projects

14. Transitional support for raising suckler cows

15. Transitional support for milk

16. Dairy sector special premium

17. Transitional support for agricultural crops

18. Transitional support for raising ewes

19. Transitional support for ewes

20. Transitional support for cattle

21. Single area payment

Source: finance ministry