At the start of June, Estonian Tax and Customs Board (MTA) informed 30,000 construction companies of a change to the law, which will come into force in October, requiring them to register the contractors operating on construction sites and the amount of time they spend on site.

The MTA's aim is to have an overview of the companies operating on construction sites, as well as provide assurance that only registered employees work in the subcontracting chain.

It also seeks to ensure that there is fair competition in the construction market and that only those who are properly qualified, and are paid a fair wage are able to work on major construction sites.

Siim Tamm, a development specialist in the MTA's tax audit department, told ERR that there is a high rate of "envelope wages" (wages on which taxes are not paid – ed.)  and VAT fraud in the construction sector, and the amendment will improve the situation. From Tax and Customs Board's perspective, the move will lead to a reduction in the risk of labor tax and VAT fraud will. The Police and Border Guard Board (PPA) will also be able to monitor foreign workers more effectively and the Labor Inspectorate (Tööinspektsioon) will be able to enforce regulations related to the working environment more easily.

However, construction companies have taken a different view. In September, Estonian Association of Construction Entrepreneurs (EEEL) sent an appeal to the Ministry of Finance, pointing out that according to the original plans, companies were only requires to provide their employees' personal identification numbers and the contractor's registration number. However, a range of additional details they are now also expected to provide, was later added into the draft regulation.

Among these additional details is information regarding the role of the person in charge of construction sites, employers, country of residence, nationality and contact information.

If the construction worker is not an Estonian citizen, then their job title, workload, nationality and identifying document number are also among the extra details required.

In the case of temporary workers, full details also have to be provided.

"We consider that the obligation to provide the information listed above cannot be imposed on construction companies and that construction companies cannot be held responsible for providing it," said EEEL chief Indrek Peterson in the appeal.

According to Peterson, the EEEL does not understand why such extensive obligations have been imposed on construction companies in particular.

"This is clearly disproportionate. There will be no positive impact for construction companies resulting from the amendments to the Taxation Act and the regulations to be introduced on the basis of it. They will only be given new obligations that create an additional burden on top of the already intensive organization and implementation involved in construction works," Peterson said.

In addition, the smart cards at the heart of the new system will not reach the businesses that require them by October 1, when the new system comes into force, because their procurement was delayed.

Kaupo Kolsar, CEO of Astlanda Ehitus and head of the Estonian Association of Construction Entrepreneurs, told ERR that there has been a lot of confusion among construction companies so far. Kolsar said that although it had initially ben hoped that the change would simplify the lives of contractors, the system currently in place is not ready for widespread use.

The introduction of the new system will also lead to a surge in costs, which Kolsar estimates to outweigh any expected financial benefits.

Kolsar said there is nothing new or surprising about registering workers on construction sites, as it is already common practice. However, he added that up to now, companies have done this on an individual basis via their own IT systems or on paper. Such approaches are not particularly convenient and, in some cases, a single worker may have a card enabling them to access as many as five or six different construction sites.

"A centralized system would also make it easier to gather and keep track of different types of employee data. All that is needed is for the site validation device to be activated and the worker to be registered. The rest would be a job for the computers," Kolsar said.

In his view, the purpose of the proposed system ought to be the simplification of the operations described above.

At the same time, the EEEL believes they should not incur any additional costs as a result of the changes and those companies, which already have registration systems in place should be able to continue using them.

Tax and Customs Board: Smart cards not required immediately

Siim Tamm pointed out that the amendment to the Taxation Act was adopted a year and a half ago and that all the representative associations were involved in the process from the beginning.

"We believe that the solution set to be implemented in October is the result of discussions involving the views of all parties. We can assure you that the MTA will only ask companies for the information that is required by the law and that the state needs in order to carry out its supervision," he said.

Tamm also said there was no reason for companies to be concerned that the volume of data they are be expected to provide will grow out of all proportion. In fact, the data provided by the Tax and Customs Board in Estonian information registers is pre-filled upon entry of the code identifying the person or entity. All that is required from companies is confirmation that the information in the system is correct.

"In this case, the information of your own employees can be downloaded directly from the employment register and does not even require an ID code to be entered. However, further data only needs to be entered in those rare cases, where the person regarding whom the data entry is required is a foreigner and is not included in Estonian registers," Tamm explained.

Regarding the delay in producing the smart cards, Tamm said that Hansab AS had won the tender contract and any issues have now been resolved.

"We have been in close communication with the professional associations. We emphasized this at a training session involving a number of participants in early September and we published information on our website highlighting that we will also take into account our own delay in the course of our monitoring activities. So, obviously, we can't demand these cards and the data that we will collect from them on site, if these cards don't exist yet," he said.

According to the EEEL, the draft bill should not enter into force before the smart cards the regulation stipulates are required have been issued.

The EEEL also wants the law to only extend to the mandatory provision of employee names and personal or business registration numbers, with any additional details left as optional.

However, Tamm noted that from October onwards, for major construction projects, registering the details of contractors, employees and the duration of construction works into the information system will be a requirement. However, the procurement of the smart cards and transmission of the data they generate will necessarily be put on hold until this becomes feasible.

System should become as user-friendly as e-payment

According to Tamm, the Tax and Customs Board understands that as this is a new obligation for businesses it will certainly take some time to get used to, as is the case for anything new. "However, we believe that over time, a certain amount of familiarity will develop and it will become a normal part of the work," he said, adding that the service is expected to eventually be seen as convenient as the Tax and Customs Board's other e-services. Where possible, pre-filled data may also be used to speed up certain processes.

Tamm also stressed that whenever a new legal obligation is put in place, the MTA tends to focus on supporting and guiding companies to adapt rather than on handing out penalties for non-compliance. The relevant information for construction companies and professional associations to be affected by these changes has been repeatedly and thoroughly distributed, he said. The MTA also plans to send out more information before October 1.

Kaupo Kolsar, head of the Estonian Association of Construction Entrepreneurs, said that as the results of the changes had not yet started to affect construction workers, it is too soon to give a complete assessment of its eventual impact. However, in his view, the wording of the draft bill and the draft amendment is disappointing.

"We hope that there will be a reasonable length of time allotted for the transition period, and are awaiting further guidance on how a smooth transition will be initiated and carried out," Kolsar said.

The Tax and Customs Board estimates that the Estonian state currently loses out on around €99.8 million in tax revenue each year due to "envelope wages," with the tax shortfall related to the construction sector estimated to exceed €20 million a year.

From October 1 this year, electronic registration will be compulsory for construction sites, which are subject to the specific work safety requirements of, and responsible for reporting to, the Labor Inspectorate.

This means that the duration of the construction work exceeds 30 working days and that at least 20 people are working at the same time, or that the total number of working days exceeds 500. Around 1,000 projects per year will be affected.

The obligation to register applies to sites for which construction work is due to begin after October 1 this year, or for which construction is already underway and is expected to be completed later than  October 1, 2024.

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