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Study: Tax Reform Boosted Economy, Helped Companies in Recession

The City is happy: abolition of tax on retained corporate earnings has had a positive impact on investment volumes
The City is happy: abolition of tax on retained corporate earnings has had a positive impact on investment volumes Source: Photo: Postimees/Scanpix

Slightly more than 10 years after corporate income tax on retained earnings was effectively abolished in Estonia, a study has found that the tax reforms had a positive impact on the economy. Others say it was a stimulus that may have outlived its time.

The final report of the study of 471 companies conducted by the Praxis Centre for Policy Research and analysts from the University of Tartu stated: "The reform was found to have a significant positive impact on the investment volumes and some effect on investment structure. In this regard, it also had a positive impact on the ability of companies to cope with the recession."

 
It also said that a positive impact was found on GDP and productivity.
 
"The results of the study conform in very large part to the idea that we set out for ourselves when we designed legislation," said Minister of Finance Jürgen Ligi.
 
As might be expected, entrepreneurs viewed the tax system positively, according to the report, but it was noted that the reform had less than expected impact on companies' decision to reinvest earnings - 40 percent did not identify this aspect as significant. 
 
Eighty percent of entrepreneurs would favor the current system over a classic model with a lower tax rate.
 
A Legal Loophole?
 
Some, like financial advisor Alar Voitka, a partner with Nordic CF Advisory, feel that the reform was timely in 2000 but should now be reviewed. 
 
Voitka said on ETV that currently hundreds of millions of euros of untaxed profits are leaving Estonia in a legal way.
 
"This income tax exemption will prove fairly costly for Estonia in the future, especially thanks to major corporations that earn quite a lot of money and remove it from Estonia without paying dividends - that is, without paying taxes to the Estonian government." Voitka pointed to the telecom sector where, he said, Tele 2 had withdrawn 166 million euros from Estonia.
 
The Tax and Customs Board says such transfers generally take the form of intra-group borrowings or sale of goods and services within the same group of companies. 
 
However, government officials say there is no proof that such lost revenue is greater in the case of the current system. Minister of Finance Jürgen Ligi: "If we look at cash flows, they have been toward Estonia, not out of the country."
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