Foreign e-shops withhold a considerable part of VAT that should be destined for the Estonian state budget. This inaction has cost Estonia nearly half a billion euros over the last few years, sworn lawyer Allar Jõks writes.
The looming holidays will see thousands of Estonians hit the websites of foreign online shops in search of presents to bring joy to loved ones. But the Estonian state will not be sharing in that joy because foreign e-shops will let their home countries claim a large part of VAT revenue that should end up in the Estonian state budget.
This has been the situation for years. Conservative estimates put missed revenue at €145 million annually. The actual sum could be slightly bigger or smaller. However, that does not change the fact Estonian money will continue to heat the rooms of fellow Europeans until the year after next.
Why cannot Estonia claim VAT revenue that's rightfully ours?
The reason is lack of information. The Tax and Customs Board does not know every European online shop or how much they sell to Estonia.
The problem is Europe-wide, with amendments to a directive governing exchange of tax information scheduled to enter into force on January 1, 2024. The directive obligates Member States to require payments services providers to keep sufficiently detailed payments data (for example, recipient information and address) for every calendar quarter.
This means that Member States will have to give up their e-shops to the tax authorities of the destination country. This would allow tax administrators to check goods and services based on payment information to successfully combat tax evasion.
Estonia is obligated to shape, adopt and execute legal norms necessary for compliance with the directive by December 31, 2023, at the latest, meaning that we stand to lose another two Christmas seasons' worth of income tax revenue.
The Estonian Ecommerce Association, which I represent in this matter, has been urging the state to collect VAT from foreign online shops before the directive's adoption for the last three years. The recent attempt to improve the system was made in September of this year when a proposal was sent to the Riigikogu to start collecting foreign VAT before the EU directive steps into force in 2023.
Estonian payments operators have the information
When an Estonian citizen, let us call her Mari, buys something from a German e-shop and pays for it using their Estonian bank account, it leaves a trail.
In order for these trails to reach the tax authority, an amendment is needed to obligate banks and other payments services providers to share the information. Even Mari can look up the payment recipient, sum and receiving country online, not to mention banks that have invested millions in their IT solutions.
Having seen the nuts and bolts of legislative drafting for over 20 years, putting something like this together would hardly have been rocket science. It would require weighing the public interest of bringing hundreds of millions of additional euros to the budget against the additional cost of banks and payments providers in complementing their information systems.
Passivity of the finance ministry coupled with opposition from banks
Commercial banks were against the amendment because rebuilding IT systems is costly and time-consuming, with personal data protection rules in need of sorting out. Additionally, it is apparently insensible to collect our revenue before the others as there will be a Europe-wide system in 2024.
We can understand banks' reluctance as the Tax and Customs Board's ability to bring home the bacon is hardly their concern. They are tasked with generating profit for their owners, while additional IT developments are hardly gainful.
However, it is difficult to understand the Ministry of Finance that also believes the matter can wait until the entry into force of the directive. Is the reason truly a side-effect of joining the EU; in other words, learned helplessness and loss of initiative it manufactures? One would not imagine Estonia forsaking independent national defense development upon coming under the NATO umbrella.
This inaction has cost Estonia nearly half a billion euros over the last few years. Because a tax administrator can demand payment of five years' arrears, every day we do nothing lessens our chances of filling the treasury. For example, Germany and Finland make sure to shake foreign e-shops good and hard until tax money lands in their coffers.
Estonia is happy to spend a fortune in public funds investigating a former minister's coffee maker, foreign trips and birthday dinner, while the fact that work left undone has resulted in nearly half a billion in missed tax revenue seems to only concern a small circle of involved parties.
What is wrong with this picture?
Parties are dressing in fancy slogans before Riigikogu elections, trying to outdo one another in terms of who can beat the voter senseless with a taller stack of benefits. These Santa Clause parties could add how they plan to make good on their promises. Borrowing to cover costs in a situation where VAT revenue is just lying there, waiting to be picked up hardly seems responsible.
It is not too late to introduce the amendment and collect even a part of tax revenue in question before the EU directive lands. Both the Covid and security crises have demonstrated that the Riigikogu can act quickly and efficiently if necessary.
The prime minister's party (Reform Party – ed.) is described as experts in matters of finance and taxation. It is time to show that they've earned the finance portfolio. Besides, Minister of Finance Annely Akkermann used to be a member of the Riigikogu Ecommerce Support Group the aim of which is to make sure local entrepreneurs have a fair business environment and generate tax revenue for the state. It seems she has the necessary qualifications. If we add the facts that payments operators have the necessary information and the tax administrator the capacity to process it, there is no justification for continued inaction.
Of course, we could do nothing and wait for time to heal all tax maladies. But, pointing to the ruling party's elections slogan, we could ask in whose hands is Estonia safe?
Allar Jõks has served as legal counsel for the Estonian Ecommerce Association in the matter of taxation of foreign online shops.
Editor: Marcus Turovski