Experts: Individual enterprise account wouldn’t contribute to economic development, address only a very small group

Former finance minister and director general of the Tax and Customs Board, Aivar Sõerd (Reform). (Postimees/Scanpix)
10/6/2016 12:45 PM
Category: Business

Finance Minister Sven Sester outlined the idea of an individual enterprise account in daily Postimees on Wednesday. The idea wants to get rid of bureaucratic obstacles and even the need for bookkeeping. Experts are critical.

According to Sester’s proposal, the Finance Ministry would create a so-called enterprise account in cooperation with the local banks. When the account holder gets paid, the money, going through the enterprise account, is split up, with tax payments going directly to the Tax and Customs Board, and the individual enterprise receiving the remainder of the money.

Not only would such a scheme help individual enterprises save money in terms of the cost of their business, Sester said, but the percentage of the combination of insurance, pension, and social tax payments could be reduced. The minister proposed 20% as a first figure.

Ernst & Young tax expert Ranno Tingas: The individual enterprise account is the carrot, the stick is sure to follow

According to auditor firm Ernst & Young tax expert Ranno Tingas, the individual enterprise account made sense as a voluntary choice for the taxpayer. “One could ask though why they waited with this for years, because it was clear a long time ago that payments of €100 from one individual to another don’t appear on any tax declaration very often,” Tingas said.

Tingas doubts that the idea will affect business development very much. Entrepreneurs needed a bold attitude and the drive to get things done, and whoever had both qualities would find a vehicle for them already now, he pointed out to ERR’s online news.

The individual enterprise account could help people declare side income properly, without the need to run the returns from their activities through a company. “If the state makes declaring taxes decidedly easier and less bureaucratic, and if it reduces the tax rate at the same time, we can assume that the majority of people will want to follow the law,” Tingas said.

Tingas added that seeing that the individual enterprise account didn’t allow anything beyond selling services to individuals, and products only to companies, the idea was very limited in terms of actually doing business. Besides, there was room for abuse as well, where an arrangement could be made that a company compensated an entrepreneur with such an account for services simply by buying their products.

Aivar Sõerd: Raising VAT minimum turnover to €40,000 makes more sense

Former finance minister and director general of the Tax and Customs Board Aivar Sõerd told ERR’s online news that in his assessment, the influence of the individual enterprise account would be minimal.

In Sõerd’s eyes the biggest issue with the idea is that entrepreneurs wouldn’t be able to deduct the costs of their business. If this was going to be compensated with a lower social tax rate, the question would immediately come up what would then happen to entrepreneurs’ pensions, as those were directly connected to the amount of social tax paid, Sõerd pointed out.

A better move against too much red tape in business, according to Sõerd, is the Riigikogu’s bill to raise the value-added tax minimum turnover to €40,000. The bill has already passed the first reading in parliament. The only issue Sõerd sees there is that the new law likely won’t enter into effect before 2018.

The planned upper limit for VAT-free business done with an individual enterprise account would thus reduce its appeal to an even smaller circle, Sõerd said, as with a VAT minimum turnover of €40,000, private limited companies would have to deal with fewer bureaucratic obstacles already anyway.

Taxpayers’ Association: Individual enterprise account draws people out of natural business, towards state-organized business

Lasse Lehis of the Estonian Taxpayers’ Association finds that the individual enterprise account would solve the practical problems of a small group of entrepreneurial individuals, but have very little influence on business development in Estonia.

Based on the available information, which was no more than what daily Postimees reported on Wednesday, Lehis said that the measure was directed mainly at those who would like to pay people helping them out.

All those who would like to pay a housekeeper or an acquaintance to help them with construction work, for example, and who couldn’t risk getting caught employing someone illegally, for all those the idea made sense.

But already applied to regular and smaller things like driving for Uber, the tax returns the government could hope for were so small that the effort to build the whole measure might not be worth it, Lehis opined.

In that sense, the individual enterprise account was interesting for a small group of people only, for example someone selling handicrafts or pastries on the side. “Especially where products are offered publicly, and where there’s a risk of getting caught by the tax board, the new measure could be the way out, making it all legal without a lot of red tape,” Lehis said.

Beyond that, Lehis found that the idea would move people away from natural business, towards state-organized business.

Editor: Dario Cavegn

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