The government has proposed a 20 percent deposit tax on loans and financial transactions to tackle the problem of foreign parent companies taking money out of the country without paying any kind of tax.

The practice of Estonian businesses held by companies abroad to grant their parents loans without intending to ever get the money back has been identified as a drain on Estonia’s economy. The proposed tax would require a deposit with the Ministry of Finance in the amount of 20 percent of any such loan or transaction.

If the parent company abroad pays back the loan within a set time, the deposit is paid back. If the loan is not paid back, the state retains the deposit as the regular 20 percent income tax it would levy on dividends paid out to any Estonian business’ owners.

Both the Employers’ Confederation and the Chamber claim that this approach wouldn’t plug the hole, and that it would damage the competitiveness of the Estonian economy. It would decrease the attractiveness of the country to foreign investors as well, the two organizations wrote in a joint statement delivered to Minister of Finance Sven Sester (IRL).

According to chairman of the confederation, Toomas Tamsar, the problem could also be solved by the Tax Board simply requalifying such a loan, and declaring it a dividend that could then be taxed.

Thus the proposed measure didn’t solve a problem, but much rather was a veiled attempt of the government to “punish” law-abiding businesses that were using a practice in their global organization that was widespread and in common use.

President of Estonia’s chamber of commerce, Mait Palts, said that Estonia had so far been successful with a simple and transparent taxation system. The deposit tax did not take into account processes that were common in business, and would bring more red tape and incur related costs. This could mean lower investment and fewer jobs, which in turn would make the tax a way for the government to lose money rather than gain revenue, Palts added.

Both the chamber and the confederation submitted their concerns to the prime minister on Apr. 3. Instead of concentrating on new taxes to be introduced, the government should deal with the lack of economic growth, making the public sector more effective, and guaranteeing the stability of the business environment, they wrote.

The new tax would affect up to 11,400 companies belonging to various multinationals active in the Estonian market, and make borrowing from them as well as transactions involving them more expensive. The part of these companies in the total turnover of all businesses in Estonia is estimated to be some 60 percent. The same companies employ more than 225,000 people and are behind about 30 percent of the state’s tax revenue.