OECD Criticizes Estonia’s Dividend Tax Measure
The OECD has taken issue with the Estonian Government’s plans to reduce the rate of tax on distributed dividends for established companies, warning that the measure could complicate the tax system and discriminate against small firms.
Under recently enacted legislation, tax on distributed dividends will be reduced from 20 percent to 14 percent for companies that pay dividends for three consecutive years from January 1, 2018. However, according to the OECD, this measure “is unlikely to have any positive impact on investment by domestic firms, because reinvested profits are not taxed.”
“Furthermore, it will add complexity to the tax system and penalize young firms,” it warned, in its latest Economic Survey of Estonia.
While the change is expected to increase revenue in the short term by encouraging the companies to distribute profits, it will decrease tax revenue in the longer term, the OECD said.
Nevertheless, the OECD welcomed measures aimed at restricting tax-free transfers of profits distributed abroad in the form of long-term loans. This leiglsation is designed to reduce the shifting of untaxed profits out of Estonia by imposing a 20 percent tax on loans between Estonian subsidiaries and foreign parent companies, although the change has been criticized by the country’s business community, which recently described it as “detrimental to the Estonian business environment.”
The OECD also praised Estonia’s general corporate tax and regulatory policy, observing that “low corporate taxes combined with business and competition-friendly regulation compensate for Estonia’s small size, which might otherwise be a barrier for investment and productivity.”
However, it criticized Estonia’s environmental tax policies, arguing that not enough has been done to reduce or price environmental damage caused by the oil shale industry and to support alternative energy sources over the past five years.
“Despite considerable increases in the tax rates on some pollutants since 2000, many taxes or charges remain below the environmental costs they generate, with a limited effect on pollution levels,” the report said.
“To increase the efficacy of action on climate change, the effective cost of CO2 emissions needs to be increased almost across the board as it is low in most sectors of the economy, including the oil shale industry,” the OECD added, noting that road transport is the only sector facing any substantial tax on CO2.
