Estonia joins the global income tax reform

07.10.2021 | 19:23

Stenbock House, 7 October 2021 – At a cabinet meeting, the government discussed Estonia joining the international tax reform led by the Organisation for Economic Co-operation and Development (OECD) and decided that Estonia would join the agreement, considering that both the minimum tax and the planned digital tax to large corporations would apply.
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The statement being prepared in the OECD concerns large global corporations and does not change the current income tax system for Estonian companies. As the next step, Estonia is now entering into close negotiations with the EU Member States and the European Commission to protect the interests of Estonia in the development of an EU directive implementing the OECD agreement.

“The Estonian corporate income tax system has been one of the cornerstones of the international competitiveness of the Estonian business environment, which must be firmly protected. As Estonia has been opposed to the introduction of a global minimum tax, we have been in intense negotiations throughout the summer to achieve a situation where this global tax would affect Estonian entrepreneurs as little as possible. As a result of the successful negotiations, the minimum tax will change nothing for most Estonian entrepreneurs and only applies to subsidiaries of large international groups,” explained Prime Minister Kaja Kallas.

“At the same time, the taxation of digital giants has long been an issue. However, such a digital tax can only work if all countries have a similar approach towards technology giants, as digital services know no borders. The tax on large digital companies affects groups with a sales revenue of 20 billion and thus does not affect any company in Estonia,” said Kallas.

The prime minister explained that the tax environment of large multinational corporations is changing anyway, regardless of the decisions of Estonia. “We are therefore joining the global tax agreement. By actively making proposals and vigorously defending our positions, we have the best opportunities to ensure that the business environment and tax policy of Estonia continue to work in the interests of a better future for all of us.”

Tomorrow, on 8 October, a meeting of the 140 countries involved in the reform will take place, with a view to approving the two-part tax package. The first pillar of the reform concerns the profit tax of groups with a sales revenue of 20 billion, or the so-called digital tax, which Estonia supports.

The second pillar of the reform concerns a global minimum tax on corporate profits of at least 15 per cent. The minimum tax would only apply to groups with a consolidated sales revenue of at least 750 million euros per year. The OECD wants to reach a political consensus in support of this proposal tomorrow, and the countries joining the reform promise to develop and enforce the necessary laws in 2023.

If the effective tax rate of a subsidiary operating in a country other than the headquarters of the group is less than 15 per cent, the country of the headquarters has the right to tax the difference between the effective and minimum tax itself, which means that in Estonia’s case, such subsidiaries may be taxed by another country.

In order to protect its interests, Estonia has held intense negotiations to give the local subsidiaries of international groups the longest possible tax postponement period, which would allow companies more flexibility to decide on their cash flows throughout the economic cycle, rather than obliging us to tax profits immediately. As a compromise, a period of four years was proposed.

Government Communication Office