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Estonia

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1) REFERENCES

Commission Opinion [COM(1997) 2006 final - Not published in the Official Journal]
Commission Report [COM(1998) 705 final - Not published in the Official Journal]
Commission Report [COM(1999) 504 final - Not published in the Official Journal]
Commission Report [COM(2000) 704 final - Not published in the Official Journal]
Commission Report [COM(2001) 700 final - SEC(2001) 1747 - Not published in the Official Journal]
Commission Report [COM(2002) 700 final - SEC(2002) 1403 - Not published in the Official Journal]
Commission Report [COM(2003) 675 final - SEC(2003) 1201 - Not published in the Official Journal]
Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

In its July 1997 Opinion, the European Commission considered that transposition of the Community acquis in the direct taxation field should not pose major difficulties for Estonia. As regards indirect taxation, although a promising start has been made, the Commission took the view that a considerable effort would have to be made if Estonia intended to comply with Community acquis on VAT and excise duties in the medium term.
The November 1998 Report noted that Estonia had made progress in aligning its VAT legislation with the acquis in order to meet the short-term priorities identified in the Accession Partnership. However, additional efforts were still required to prepare for the Community's transitional VAT regime and to align the excise legislation.
The October 1999 Report noted that Estonia had made some progress on bringing the legislation on excise duties into line with the acquis and strengthening administrative capacity in the field of taxation. On VAT legislation, limited progress had been made.
The November 2000 Report noted that Estonia was continuing to align its legislation in this field. It had partially met the Community's requirements relating to indirect taxation (VAT and excise duties). In addition, the first measures had been adopted to strengthen cooperation and mutual administrative collaboration. As far as direct taxation was concerned, the new law on income tax entered into force in January 2000. New procedures aimed at improving the efficiency of the tax administration as well as initiatives encouraging the use of information technologies had also been introduced.
The November 2001 Report noted that Estonia had made progress, particularly with regard to VAT and excise duties (tax warehouse system for alcohol, gradual increase in tax on mineral oils, extension of duties to cover fuel and similar products, introduction of a combined rate for cigarettes). There were no specific developments to report in the fields of direct taxation or administrative cooperation and mutual assistance. As regards administrative capacity, the Tax Board launched the e-Tax Board, which was working well.
The October 2002 report stresses that Estonia has made progress in aligning its VAT legislation with the acquis. In the area of direct taxation, Estonia must continue to align its legislation by removing provisions that are incompatible with the EC Treaty in respect of the free movement of capital. No legislative progress has been made as regards administrative cooperation and mutual assistance. However, new measures have been implemented to strengthen Estonia's tax administration.
The 2003 Report shows that Estonia is essentially meeting the commitments and requirements arising from the accession negotiations as regards VAT, excise duties, administrative cooperation and mutual assistance; it should be in a position to implement the relevant acquis upon accession. Estonia needs to adopt legislation in some areas, so as to complete alignment, as well as to strengthen its tax administration. Estonia should continue its efforts to set up the information technology systems allowing for the exchange of computerised data with the Community and its Member States. Estonia is also meeting the majority of the commitments and requirements arising from the accession negotiations in the area of direct taxation.
Estonia has obtained a transitional period concerning the continued application of the reduced VAT rate on heating sold to natural persons, housing associations, apartment associations, churches, congregations and institutions or bodies financed from the State, rural municipality or city budget, as well as on peat, fuel briquettes, coal and firewood sold to natural persons (until 30 June 2007), a derogation to apply a VAT exemption and registration threshold of EUR 16 000 for small and medium sized enterprises, and a VAT exemption on international passenger transport. Estonia was also granted a transitional arrangement for delayed implementation of the overall excise duty on smoking tobacco (until 31 December 2009). Another transitional measure permits Estonia, for as long as it charges income tax on distributed profits without taxing undistributed profits, and at the latest until 31 December 2008, to continue to apply that tax to profits distributed by Estonian subsidiaries to their parent companies established in other Member States.

COMMUNITY ACQUIS

The Community acquis in the area of direct taxation mainly concerns some aspects of corporation taxes and capital duty. The four Treaty freedoms have a wider impact on national tax systems.

The legal framework for indirect taxation consists primarily of harmonised legislation in the field of value added tax and excise duties. This includes the application of a non-cumulative general tax on consumption (VAT) which is levied at all stages in the production and distribution of goods and services and requires equal tax treatment of all domestic and import transactions.

In the field of excise duties, the acquis comprises of harmonised tax structures and minimum rates of duty together with common rules on the holding and movement of excisable goods (including the use of tax warehouses).

EVALUATION

Value Added Tax

Estonia's current VAT system is based on the main principles of Community legislation. Since June 1999, the zero-rating for sales of thermal energy, coal and wood has been abolished. However, several differences between Estonian legislation and the Community acquis still remain. In 2000, Estonian legislation did not fully conform to the acquis: although the system was based on the 6th VAT Directive, there were still too many reduced rates or zero ratings and too many exemptions. A new law to harmonise legislation with the 6th VAT Directive entered into force in January 2002. This new law eliminates VAT exemptions on certain supplies of goods and services, replacing them with reduced rates. At the end of 2003, Estonia still needed to complete alignment in the area of VAT by eliminating zero-rating on certain periodicals and educational textbooks, aligning its definition of taxable person, and introducing refunds for foreign taxable persons not based in Estonia. It also needed to introduce the special schemes for travel agents and investment gold, align the scope of some VAT exemptions, except in the areas where it has obtained transitional periods, and introduce the intra-Community VAT regime.

Excise duty

The new Tobacco and Alcohol Excise Tax Acts have entered into force. The Tobacco Excise Tax Act brings excise tax rates for tobacco products closer to the minimum EU levels. It is unlikely that Estonia will be able to bring its rates completely into line with those of the EU until 2008. It has not yet started preparing a new law for further harmonisation of tobacco excise duties. The Alcohol Excise Tax Act harmonises the excise tax rates on beer with the rates applied in the EU. The lower tax rate for small national brewers has been abolished. However, wine, fermented beverages and other intermediate products will need additional legislation. As regards implementation Estonia does not have either tax warehouse or registration systems. In spite of a gradual rise in excise duties, the duties applied to alcohol, tobacco and fuel are still below the levels required by the acquis. The tax warehousing system for mineral oils and tobacco products has yet to be established. No further progress was made in this area in 2002. At the end of 2003, Estonia needed to align duty rates on certain mineral oil products, some exemptions and the reimbursement system, and to extend the duty suspension arrangement to intra-Community movements. The gradual increase of excise duties on cigarettes is proceeding on schedule to reach the minimum rate level on 31 December 2009 (as provided for in the accession negotiations).

Direct taxation

With regard to direct taxation, amendments to Estonia's income tax legislation were adopted in October 2001. These amendments provide that profit distributions will be taxed regardless of whether the dividends are paid to resident or non-resident legal persons. They enter into force in January 2003.
In addition, Estonia needs to accelerate efforts to align its legislation, notably by removing remaining discriminations concerning the free movement of capital on payments of dividend income by Estonian companies to non-resident individuals. Estonia also needs to transpose the Directives on Interests and Royalties and on Taxation of Savings Income.

Administrative cooperation and mutual assistance

An agreement between all three Baltic States on cooperation on simultaneous tax audits entered into force in June 1999. This agreement envisages broader possibilities for cooperation between tax administrations with a view to implementing effective checks on taxpayers in the Baltic States. Estonia has also made some progress concerning interconnectivity of its systems with Community IT systems and a VAT Information Exchange System (VIES) platform has been developed.
The central liaison office was set up in 2003. However, the excise liaison office has not yet been established. Preparations for the VAT Information Exchange System (VIES) and for the System for Exchange of Excise Data (SEED) databases are ongoing and proceeding according to plan.

Administrative capacity

In November 2000, substantial efforts were required by Estonia to reinforce the capacity of its tax administration to combat tax fraud effectively. Better cooperation between the different authorities, such as the Tax Board, the Customs Board and the Security Police Board, was essential in this respect. Progress was achieved in 2001 with the establishment of a Tax Fraud Investigation Centre, which signed an agreement with the Security Police Board. This agreement allows immediate exchange of operational information and more efficient cooperation during surveillance proceedings.
At the end of 2003, the administrative structures needed for VAT were in place but Estonia needed to take further action on modernisation, tax collection and control and audit procedures. For excise duties, the necessary administrative structures were ready but Estonia still needed to pay special attention to the persistent problem of fraud in the mineral oil sector.

This summary is for information only and is not designed to interpret or replace the reference document.

Last updated: 12.01.2004
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