Future government plans wide-ranging tax reform

Photo: Liis Tremann

The new government plans to introduce an €315 million investment program, privatize, either in part or in full, four state-owned companies, lay down a banking tax, abolish income tax incentives on loan interests etc. Grand redistribution of taxes is also in the pipeline that will see minimum income exempt from tax raised from the current 170 euros a month to 500 euros from 2018.

“The income tax rate will not be hiked, it will remain at 20 percent. There will be just as many brackets as there are today,” said Center Party chairman, expected future PM Jüri Ratas at a press conference yesterday evening. He added that the tax reform concerns more than half a million people.

The new coalition promises that people earning up to 1,200 euros a month will soon get to keep 62 additional euros every month. People making 1,758 euros a month will get the same they get today, while those earning more than 2,100 euros a month will have to pay income tax on their entire salary and will therefore get to keep 38 fewer euros.

“We are making one of the most important tax reforms in Estonian history; we are doing what international organizations have been suggesting we do for a long time. Three quarters of salaried workers will get to keep more than 60 additional euros a month. It will alleviate paid poverty, create more equality inside the system, while we will ensure that labor taxes will fall as a whole,” said Jevgeni Ossinovski, chairman of the social democrats.

Elering to wait its turn

The new government also plans to privatize four state companies either partially or in full. Road handler Estonian Roads will be privatized in full, 49 percent of shares of rail goods carrier EVR Cargo, 30 percent of Port of Tallinn, and 49 percent of Eesti Energia subsidiary Enefit Renewable Energy will be transferred.

When asked why the plan does not include privatization of a minority holding in transmission network operator Elering, chairman of the Pro Patria Res Publica Union (IRL) Margus Tsahkna said that partial privatization of Elering has not been discussed yet.

Another important change is the plan to lower the income tax rate on dividends from the current 20 percent to 14 percent. It is one of the proposals made by the current government's economic revitalization working group, headed by Erkki Raasuke. The rate will be lowered for companies that pay dividends for three consecutive years.

The incoming government plans to invest a total of €315 million in infrastructure, housing, and defense. Tax incentives for new companies are also planned.

While the general social tax rate will be maintained at the current 33 percent, the rate will be lowered in certain sectors and for companies just starting out. Jüri Ratas said that one sector that will have access to tax breaks is the shipping and maritime industry.

Tourism economy should delight in the decision to abolish the planned accommodation providers' VAT hike.

The financial sector will find it has drawn the shortest stick, looking at new taxes and liquidation of current breaks. The new coalition promises a banking tax. One of the biggest problems in Estonian banking is concentration – just three or four major banks hold more than four-fifths of savings and loans. It is believed boosting the banks' tax burden could lead to even greater concentration.

“I do not agree as this will definitely not affect the volumes of these banks,” Tsahkna said. He added that he does not believe the new tax would discourage banks from coming to Estonia as the rate will be very modest. “I even think it could be bigger,” he said.

“Banks do not come here because our taxes are too high, but because the market is very low,” the IRL chairman believes.

The new coalition also promises to limit the practice of taking profits our of Estonia tax-free, while Tsahkna did not have an answer yet when asked how the coalition plans to achieve it. The exact plan will be put together by the finance ministry, and the move is set to yield initial proceeds in 2020.

Attack on interest income

The new government will also go after interest on deposits by taxing it.

It is true that interest rates have hovered around zero in recent years, making for negligible income. Head of the social democrats Jevgeni Ossinovski said that people on average have deposits of 1,000 euros, which is not enough to make them any money. Interest income is substantial for wealthier people whose deposits are considerable.

However, low interest rates are not perpetual, and abolishing the income tax exemption on deposit interest constitutes a precedent.

The incoming coalition vows to lay down a tax for sweet soft drinks and hike the excise duty on beer, cider, and wine. Another planned tax is a registration fee for new vehicles based on engine power.

The parties have also talked about so-called fair fines the extent of which will depend on the level of income of persons fined.