Report: Corporate income tax reduction trend is on the brink of reversal

“The future of corporate income tax is affected by countries’ efforts to harmonise taxation rules in an attempt to reduce opportunities for tax optimisation. OECD estimates that the global loss of corporate income tax revenue amounts to EUR 86–210 billion a year,” said Foresight Centre expert Magnus Piirits. “When international agreements begin to reduce opportunities for tax optimisation for businesses, we might see an even more intense competition in tax rates among countries.”

Piirits also lists the digitalisation of economy and the shrinking of labour taxes basis as other strong inducements to raise corporate income tax in the future. “We need to decide how to finance the expenses of countries. In principle, we do not need to tax income necessarily at the company level if we manage to tax the capital income and assets of private citizens in a more efficient way. If we fail to do that, the burden will fall on the business sector and the trend of lowering corporate income taxes could reverse,” Piirits explained.

The corporate income tax revenue in Estonia is the lowest in Europe. “And yet the effective corporate income tax rate is the highest among the Baltic states in Estonia. In 2019, 9.6% of the profit was paid as corporate income tax in Estonia,” Piirits said. “Meanwhile in Latvia, which has a similar system to ours with its 20% tax rate and tax exemption on undistributed profit, it was only 1.2%. In Lithuania, with its 15% nominal tax rate, the effective rate or the actual revenue was 6.6% of the corporate profit,” he explained. 

In 2019, corporate income tax accounted for 5.5% of Estonia’s state budget (EU average was 6.9%) and 1.8% of the GDP (EU average was 2.8%). In 2020, corporate income tax brought EUR 450 million to Estonia’s state budget. In Estonia, the corporate income tax includes income tax from dividends, advance income tax of credit institutions, and income tax on fringe benefits.

An important global change in corporate taxation is the OECD and G20 initiated worldwide minimum 15% corporate tax rate which was agreed in July 2021 and would apply to businesses with the annual sales profit of over EUR 750 million. “In Estonia, this would concern a handful of businesses, but the relevant tax revenue impact is yet to be determined,” Piirits added.

The brief report “Corporate tax in Estonia and European Countries” can be downloaded https://bit.ly/3lLPVrF. 

In 2021, the study projects of the Foresight Centre include “Future-proof tax structure”, which seeks solutions for covering the costs in an ageing society, and the opportunities to change the tax system over the next 15 years.

The Foresight Centre is an advisory board at the Chancellery of the Riigikogu that analyses long-term developments in society and economy. The Centre conducts research projects to analyse the long-term developments in the Estonian society, and to identify new trends and development directions.