Areas of Strength
- Estonia performs strongly regarding the digitalisation of its tax administration and is innovative in their practices. With 98% of tax returns filed electronically (EU average: 75%), and mandatory digital income reporting via employers for personal income tax (PIT), the system ensures minimal taxpayer effort and high levels of compliance. For example, Estonian taxpayers' personal income tax declaration is pre-filled, 97% of all personal income tax declarations are submitted electronically and 32% of them by one click. This digital-first approach has reduced tax compliance costs and ensures high levels of transparency.
- Estonia maintains a deliberately broad-based VAT system with relatively few exemptions and reduced rates. As a result, Estonia’s VAT policy gap was just 34.9% of notional ideal revenue in 2023 (EUR 2.1 billion), significantly below the EU average of 50.5%. With fewer deviations from the standard rate, Estonia is able to capture more VAT per euro of consumption. Due to its broad VAT base, Estonia’s recent increase in its VAT standard rate from 22 to 24 percent is also likely to yield proportionally more revenue with less leakage through reduced rates and exemptions.
Areas for Improvement
- In light of rising medium-term funding needs (i.e. defence, ageing, health, climate), an evidence-based review of Estonia’s corporate tax system could be envisaged, focusing for instance on whether the distributed-profit tax regime is still fit for purpose. Given that consumption and labour taxes already play a large role in Estonia’s tax mix, such a review could offer a more balanced way to mobilise revenue than relying on rate hikes alone. Specifically, Estonia could assess options for strengthening enforcement of the current corporate tax system through capacity-building or gradually transitioning towards broadening the tax base (e.g. towards a standard corporate profit tax with an allowance for corporate equity).
- Although there is an obligation to report annually tax expenditures currently, Estonia lacks a comprehensive formal framework to evaluate tax expenditures. Over 30% of these schemes remain unassessed for cost-effectiveness or unintended consequences. By adopting a comprehensive methodology for tax expenditure reporting, Estonia could move towards a more regular, comprehensive and outcome-oriented evaluation of tax expenditures to ensure that tax expenditures are justified compared to direct subsidies. This could also help identify inefficient incentives and redirect resources to more impactful areas.
Tax Complexity
Estonia ranks 1st out of the 27 Member States in the Tax Complexity Index (‘TCI’), where a higher rank corresponds to lower tax complexity. The TCI is based on the Global MNC Tax Complexity Project, a joint research project of Deborah Schanz (LMU Munich) and Caren Sureth-Sloane (Paderborn University). The TCI 2024 places Estonia as global leader, thanks to its outstanding performance with regards to Tax Code Complexity (1st place among Member States and also at global level). Meanwhile, the country ranks 4th among Member States in the Tax Framework Complexity Rank. Both features suggest a tax system largely favourable to growth and investment, both in terms of structure of the tax regulations (particularly in the areas of minimum tax and capital gains, according to the authors) and in tax processes carried out by the authorities (notably, in the area of enactment).
The full Commission Staff Working Document of the Mind the Gap Report - Challenges and opportunities for tax compliance and tax expenditure in the EU regarding Estonia can be found here.
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