The Riigikogu convened for an extraordinary session on Monday morning in order to handle numerous bills left open at the conclusion of its spring season, including those introducing a sweetened beverage tax and amendments to tax-related acts and the State Budget Act.
The extraordinary session's agenda included the third readings of 14 bills, including a bill introducing a sweetened beverage act, bills to amend the Income Tax Act, the Value Added Tax Act and the Traffic Act as well as a bill to amend the State Budget Act.
The agenda also included the third reading of the "Bill on the Ratification of the Agreement between the Government of the Republic of Estonia, the Government of the Republic of Latvia and the Government of the Republic of Lithuania on the Development of the Rail Baltic/Rail Baltica Railway Connection."
Monday morning's extraordinary session is scheduled to continue until all items on the agenda have been addressed but not past 1:30 p.m. Should all items on the agenda not be addressed in that time, the Speaker of the Riigikogu will convene another extraordinary sessions beginning at 3 p.m. which will run until all items on the agenda have been handled.
Sweetened beverage tax passed 52-37, no abstentions
The Riigikogu approved a law on the taxation of sweetened beverages according to which all sweetened drinks containing mroe than 5 grams of sugar per 100 milliliters will be taxed, at a rate of ten cents per liter for beverages with a sugar concentration of 5-8 grams per 100 milliliters and a rate of 30 cents per liter with higher sugar content. Drinks containing sweeteners will likewise be taxed 10 cents per liter.
The government has also decided that Estonia would ask the European Commission for an exception for natural juices, dairy drinks and yogurts without added sugar or sweeteners. In addition, sweetened drinks which would be used to produce other drinks, food products, medication and other such products would be exempt from tax.
The law, which is to enter into force on Jan. 1 of next year, will introduce the tax in stages through 2020 in order to allow consumers to get used to new tastes and for manufacturers to work out new recipes.
The Ministry of Finance expects the taxation of sweetened drinks to bring in an additional €15 million to the state budget in 2018, €16 million in 2019 and €17 million in 2020.
Amendments to Funded Pensions Act, Investment Funds Act passed 74-0, 4 abstentions
In accordance with amendments to the Funded Pensions Act and Investment Funds Act passed on Monday, the range of pension contracts available to people with second-pillar pension entitlements upon their retirement will be expanded with a pension contract with investment risk. In connection with the addition of new contracts, the principle will also be changed whereby an individual can only have one pension contract upon retirement.
In the future, a pension fund's unit-holder can conclude multiple pension contracts, such as one with investment risk and another with a guaranteed interest rate. While this provides the person with an opportunity to earn money to a certain extent, it also allows to hedge against risks related to investment by means of having part of the pension free of investment risk.
The amendments involving the concluding of pension contracts under new terms are to take effect on Jan. 1, 2018, while amendments related tto the transposition of the revised EU Directive on Institutions for Occupational Retirement Provision will take effect on May 21 of that year.
Amendments to State Budget Act passed 53-38, no abstentions
The Riigikogu adopted a bill of amendments to the State Budget Act which will allow for an annual budgetary deficit of up to 0.5 percent of the GDP and calls for checking the budget's structural balance in a multiyear view as an average of several years.
In accordance with the amendments, the impact from previous and new decisions on the state budget will be illustrated in a four- rather than one-year outlook. Every year, plans made in earlier years will be adjusted in accordance with changed circumstances. Bureaucracy for the government will also be reduced by bringing together the processes of drawing up the fiscal strategy and the state budget.
Under existing law, the state budget must be drafted in such a way that the structural budget position of the general government sector is balanced or is in surplus, taking into account the financial forecast of the Ministry of Finance.
The Riigikogu also backed proposals for showing planned external support in the fiscal strategy in a breakdown by year as well as offering the government an overview of the use of budgetary funds at least twice per year.
Law on simplified taxation of business income passed 81-0, with one abstention
The Riigikogu passed a law on the simplified taxation of business income according to which 2018 will see the launch of a sytem of business accounts enabling natural person to sell goods and services for up to €25,000 per year by paying a simple 20 percent tax on revenue. The 20 percent tax will also include social security and pension components.
Business accounts can be used by natural persons for the sale of services and goods to other natural persons and for the sale of goods to legal persons for up to €25,000 annually. In order to avoid abuse, no services can be sold to legal persons.
Income earned through such a business account will be taxed with a lower 20 percent tax rate, which includes both income and social taxes as well as tax for mandatory funded pensions.
The calculated amount of tax will be reserved and transferred to the Estonian Tax and Customs Board (MTA) as soon as the income has been transferred to the special account created with a commercial bank; no expenses will be deducted. The tax of 20 percent of revenue flowing into the business account will be distributed proportionally into the state budget and municipal budgets as well as health insurance and pension insurance.
The Ministry of Finance estimates that implementing the business account system will reduce the state's tax revenue by €1 million, while the revenue from income tax is expected to decrease by €386,000 and social tax by €614,000.
The negative impact of the business account originates from the fact that a certain amount of self-employed persons can save on tax expenses thanks to the system. Based on data from 2015, the ministry has calculated that there are approximately 4,300 of such self-employed persons, which means that approximately €2.8 million of state income will not be received.
In order to implement the plan, the state needs expensive IT developments first and foremost in the IT systems of the Tax and Customs Board, but also in the information systems of social security used by the Estonian Health Insurance Fund, Estonian National Social Insurance Board and the Estonian Unemployment Insurance Fund. Investments must also be made by the private sector, mainly commercial banks.
Amendments to Income Tax Act passed 53-35, no abstentions
The bill of amendments passed by the Riigikogu changes the rules for the taxation of share options, sets out a lower income tax rate of 14 percent on profit for companies regularly distributing their profit, establishes a so-called advance income tax for credit institution and changes the principles of calculating fringe benefits related to passenger cars.
In accordance with the bill, the fringe benefit related to the use of a company car for work and private drives can only be declared based on kilowatts, regardless of distance covered during private use. The basis for calculating the size of the fringe benefit for passenger cars is €1.96 per unit of engine power according to the traffic register, and €1.47 if the car is more than five years old.
The bill also introduces amendments related to spouses' joint tax returns, forgoes the planned deposit income tax, specificies the rules for taxing hidden profit distributions, expands tax incentives in the organization of the employer's transport as well as makes other technical amendments.
A resident physical person has the right to deduct from a tax period's income the additional basic exemption of €2,160 on behalf of one's spouse if the spuose has not deducted it themselves. The additional deductible sum, however, must not exceed €50,400. This update to the law can be applied when declaring this year's income next year already.
The bill also specifices the taxation procedure for hidden profit distributions. The tax evasion provision added to the law specifices that the MTA can tax loans given to shareholders, partners or members with income tax if the circumstances of teh transaction hint that, by its nature, the transaction is about profit distribution.
If the term of repaying a loan issued to a parent or sister company is more than 48 months in length, the taxpayer, at the demand of the MTA, will be subject to the responsibility of proving that they are able and intend to repay the loan.
According to the bill, fringe benefits do not include business expenses made by the employer for the transport between home and the workplace of an employee employed under a contract of employment if the employee lives at least 50 kilometers from the workplace or if the employer organizes transport with a vehicle that has at least eight seats or is a bus as defined by the Traffic Act.
These amendments will enter into force on Aug. 1, with the exception of those parts concerning the Income Tax Act and Value-Added Tax Act, which will enter into force on Jan. 1 of next year.
Editor: Aili Vahtla