This minimum tax rate would be mainly used to target the largest and most profitable multinational companies (“MNCs”) such as Amazon, Apple, Google, Facebook, and Netflix and discourage them from shifting profits and tax revenues to lower tax countries regardless of where their sales are made.
Over the years, we’ve seen income derived from intangible sources such as patents, software and royalties on intellectual property increasingly migrate to lower tax jurisdictions, allowing companies to circumvent paying higher taxes in their
home countries.
HOW WOULD A TAX RATE WORK GLOBALLY?
The global minimum tax rate would apply to overseas profits. Governments are still able to set a local corporate tax rate and if a company pays a lower tax rate in another country, their home government is entitled to raise the rate to the minimum tax rate, thereby eliminating the advantage of shifting profit.
Governments have broadly agreed on the basic design of a minimum corporate tax rate. The G7 accord creates strong momentum around the 15 per cent and above level which has also been adopted by the OECD and G20.
Countries will now have to figure out how to implement such a complicated new system, which includes redistributing tax revenue among the countries that have opted in. New standards and mechanisms will need to be drawn up before governments and lawmakers can adopt them in domestic laws.
Looking at past global tax initiatives, such as the ‘Common Reporting Standard’, ‘Base Erosion and Profit Shifting Action Plan’, and FATCA as a benchmark, putting any such program in place can take years. Its effective implementation by 2023 is an ambitious goal.
“ITS EFFECTIVE IMPLEMENTATION BY 2023 IS AN AMBITIOUS GOAL”
WHAT IT MEANS FOR ESTONIA?
The Estonian government has agreed to sign on to a 15% global minimum tax rate on multinational firms.
Estonia has been concerned that joining the reform could threaten its vibrant tech start-up sector. Estonia has a unique deferred corporate tax system. There is zero corporate income tax on retained and reinvested profits in Estonia and a 20 or 14 per cent tax on distributed profits. In other words, Estonian corporate profits are not taxed until dividend distribution.
The original aim of the global minimum tax was to end the use of artificial tax schemes, but in the text presented for discussion, it has become a means of restricting tax competition that does not sufficiently take into account the interests of small countries.
It is important to emphasise that the proposed global corporate tax reform will not apply to small and medium sized companies (SMEs). It is designed for MNCs. It only applies to companies with an annual
turnover of more than 750 million euros ($870 million) a year. Smaller businesses will still pay corporate tax at their current rates.
Though it is still too early to predict overall outcomes, the global tax rules create uncertainty which may cause delays to investment decisions. Additionally, there may not be a standard response across MNCs as certain investments may be categorised differently.
For example, large tech companies can move around more easily compared to those in production or manufacturing, but even so, are dependent on the availability of a skilled workforce. Companies that
are seeking to apply strategies such as diversification of supply chains or require proximity to markets may be less inclined to move.
The impact of the new tax rules aimed mainly at MNCs on the tax advantages that Estonia offers remain to be seen. Tax experts say that it is too early to tell how this will impact Estonia’s attractiveness as a global digital business hub and a gateway to and out of the EU.
NON-TAX BENEFITS OF ESTONIA
Aside from the corporate tax considerations, MNCs will also consider the non-tax benefits. Estonia’s infrastructure and reliable legal system, good business climate, simple tax system, advanced digital society as well as well-trained labour, eResidency program, highly developed business services and fast and simple digital company registration procedures are among the “intangibles” that companies consider beyond the euros and euro cents.
As Estonia is a member state of the European Union, companies registered in Estonia enjoy all the benefits of doing business in the European region. Creating a company in Estonia is quick and easy.
Here are 10 facts that show the immense benefits Estonia has to offer to businesses of any size:
- The most advanced digital society in the world
- More than 20,000 new Estonian companies have been set up by non-resident freelancers, digital nomads and eResidents
- Access to the start-up ecosystem. Estonia is a start-up hub, producing ca. one unicorn per annum (Skype, Bolt, Wise, etc.). The country ranks no. 1 in the world for unicorns per capital
- It has an incredibly simple tax system
- It offers a low level of bureaucracy
- It offers a transparent, secure and fully-digitised Company Register
- There’s a highly-advantageous e-residency programme
- Estonia offers a tax-free environment for expats regarding foreign dividends
- Start-up, digital nomad and major investor visas are available for non-residents
- It’s a secure and transparent ecosystem, where 99% of governmental services can be found online.
E-RESIDENCY OF ESTONIA
What is e-Residency?
In December 2014, Estonia was the first country in the world to introduce e-Residency. The program allows non-Estonians to have remote, digital access to a range of e-services such as company formation, banking, payment processing, and taxation. E-residents receive a digital ID card, which they can use to securely authenticate themselves online and digitally sign, encrypt and send documents.
Thanks to e-Residency, it’s possible for a Chinese entrepreneur to establish an Estonian company that can be run from Shanghai and serve their clients based in France, for example. Everything is handled online, remotely, and totally hassle-free.
The benefits of Estonian e-Residency The Estonian e-Residency program allows you to:
- Establish an EU-based company, 100% online
- Enter Estonia’s digital business environment, one of the most advanced in the world
- Keep your business in the EU
- Declare taxes or open an Estonian business banking or fintech account
- Be granted e-resident status for a period of 5 years
- Pay and receive payments using convenient online banking tools
- Go paperless with secure digital solutions
- Automate or delegate business administration with the help of members of the e-Residency Marketplace
- Network with over 82,000 like-minded e-resident entrepreneurs
How does a global tax reform affect e-Residents?
Finally and most importantly, the tax reforms will not apply to small and medium sized enterprises (SMEs), as they fall below the expected threshold. Small and medium sized businesses represent the majority of economic activity in many jurisdictions and their tax situation will remain unchanged under these proposed rules.
Estonia will remain a relevant global digital hub with its attractive corporate tax legislation, and simple tax system. The global corporate tax reform does not affect tens of thousands of digital nomads and e-Residents that have recently found Estonia as their welcoming abode from where to run their company.
If you’re interested in starting your Estonian company, take the first step and get in touch with us today to book your free 15-minute consultation.
