At a cabinet meeting on Thursday, the government discussed Estonia joining the global minimum corporate tax initiative led by the Organization for Economic Cooperation and Development (OECD) and decided that Estonia will join the reform.
The reform, being drawn up by the OECD, affects global large corporations and will not change the existing tax system currently imposed for Estonian companies, the government announced on Thursday evening.
As the next step, Estonia will now enter detailed discussions with other EU member states and the European Commission to protect Estonia's interests in working out the EU directive, which will implement the OECD agreement.
"The Estonian tax system has been one of the pillars of international competitiveness for the Estonian business environment and this needs to be protected. Since Estonia has been against establishing a global minimum corporate tax, we have been in discussions throughout the summer to achieve a situation, where this global tax affects Estonian entrepreneurs as little as possible," Prime Minister Kaja Kallas commented.
Kallas added that the government achieved an understanding that the global tax would not change anything for Estonian entrepreneurs and only affects subsidiaries of large international corporations.
"Taxing digital giants has also been discussed. A digital tax of this sort can only work if other countries act similarly against digital giants, as digital services do not know state borders. The digital company tax affects concerns with 20 billions of sales revenue and affects no company in Estonia," the prime minister noted.
She said the tax environment of large international corporations is set to change anyway, regardless of Estonia's decision. "And for this reason, we will join the global tax agreement. By making proposals ourselves and protecting our positions, we have strong opportunities to make sure that Estonia's business environment and tax policy will continue to work toward our best interest," Kallas said.
On Friday, a meeting between 140 countries involved in the reform will take place, in which the plan is to approve the tax package consisting of two major pillars. The first pillar affects income tax for companies with more than 20 billion in sales revenue, meaning a so-called digital tax, which Estonia supports.
The second pillar of the reform has to do with a global minimum corporate tax on profits, which would be at least 15 percent. The minimum tax would only be imposed on corporations whose consolidated sales revenue reaches €750 million a year. OECD hopes to achieve a political consensus for the support of this proposal on Friday and countries joining the reform promise to draw up and impose the necessary laws during 2023.
If the effective tax rate of a subsidiary operating in a different country than the concern's headquarters is less than 15 percent, the state in which the headquarters are located, has the right to tax the difference in the minimum tax and the effective tax. For Estonia, this means such subsidiaries would be taxed by another state.
In order to protect its interests, Estonia has held intense negotiations to give the local subsidiaries of international groups the longest possible tax postponement period, which would allow companies more flexibility to decide on their cash flows throughout the economic cycle, rather than obliging us to tax profits immediately. As a compromise, a period of four years was proposed.
Editor: Kristjan Kallaste