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What is the Estonian Corporate Income Tax System?

What is the Estonian Corporate Income Tax System?

An interview with the head of Taxpayers Union of Georgia Gigla Mikautadze

– The government is working on the abolition of income tax. As we found out a few days ago, the Ministry of Finance is considering the Estonian model. What does the Estonian corporate income tax reform include? 
Profits are not subject to tax at the moment when they are earned. Instead, taxation is deferred until the distribution of profits. We were thrilled when the Finance Minister said that he was also in favor of this model, as an alternative to it does not include the company’s entirely profit exemption, but only reinvested profit tax exemption, which is widely used in many countries.

However, in my opinion, this will increase additional bureaucratic barriers as it will become even more difficult to define what is reinvesting and what not. We welcome the fact that the company’s earnings will not be taxed till the end of the year but only when the profits are distributed among the company’s partners.

– What model did you propose to the government?
– We offered a gradual cut of corporate tax rate , for example, to reduce by 5% each year and in 3 years it will be 0%. After that the tax on dividends are expected to increase as these two taxes balance each other.

– Does the Estonian model envisage phasing?
– No, in Estonia it happened immediately. It entered into force in 2000, which led to its results. First revenues from corporate income tax actually reduced, however, it began to rise in the next year. Do not forget that when the company carries out reinvesting and uses the money to increase the company’s capitalization, revenues from income tax increase as well as from property tax because when the company invests more money in its business, the more people will be employed, more machines will be purchased, business will be expanded in different directions.

– In what period after the change enters into force Georgia will feel the benefit?
– If the government adopts the decision in September, in our view, we should expect the first effects next year. The most obvious would be the year 2017, all indicators show the effect of this reform.

– How do you think which version the government will prefer – a direct copy of the Estonian model or the amendments will be introduced based on Georgian reality? Generally, what would be more effective?
– I was very surprised by Khaduri’s statement, as previously Giorgi Kvirikashvili spoke in Parliament only about tax exemption for reinvested profit, the Finance Minister speaks about the Estonian model. I agree that it should not be enacted in a month, it will take several months, observation and analysis. It’s hard for me to answer whether the Estonian model will be adopted. I suspect that we cannot adopt it exactly because our budget is not in good condition.

– If the government exempts reinvested profit from tax, whether it will create problems?
– If reinvested profit will be exempted from tax, there will be another controversial issue. There will be a new level of bureaucracy. Corruption is increasing in direct proportion to the growing bureaucracy. The Estonian model’s advantage is that the company no longer has to artificially increase costs and show lower profits, which always happens. Tax cuts are good, but if we are carrying out the reforms, we should choose this model. If the government carries out this bold reform, it will be a big plus for them. Even the previous government, which was marked by this tendency, could not take this step.