Andrei Tuch

Andrei Tuch is a Tartu-based writer and freelance translator.

Andrei Tuch: Welcome to Estonia’s new neo-Nazi government

If the Centre-EKRE-Isamaa coalition comes true in Estonia, the far-right EKRE will hold prime minister Jüri Ratas by the balls and dictate the coalition’s policy, Andrei Tuch writes.

The Estonian parliamentary election resulted in what initially looked like a rather worrying but non-apocalyptic result. Out of the 101 seats in the Riigikogu, the pro-business, pro-European Reform Party got 34; the incumbent coalition-leading, leftish-populist Centre Party got 26; the moderate nationalist Pro Patria (Isamaa) got 12 and the Social Democrats got 10. The worrying part was, the significant gain of the populist far-right Estonian Conservative People’s Party (EKRE), which ended up with a whopping 19 seats.

The election was the culmination of a three-year reversal in what Estonians were used to seeing: Reform had been in charge since 2007 but found itself in opposition for just about the first time in history, after the ejection of former chairman Edgar Savisaar* made Centre much more palatable to coalition partners Isamaa and the Social Democrats.

Reform’s downfall was a succession of deeply unpersonable leaders, from the grey cardinal, Siim Kallas (forever tainted by an association with a bank scandal in the early 90s), to Andrus Ansip (the EU’s longest-serving prime minister at one time, kicked upstairs to Brussels after literal street protests – not against his party or policy, but against his personality), to Jürgen Ligi, holder of many ministerial portfolios but not his tongue.

But while the Reform leadership was irritating, it wasn’t exactly incompetent, and the newly-minted prime minister, Jüri Ratas, had a small window to prove himself to an electorate that wasn’t very enthused about the palace coup. After passing a couple of successful headline policies – an income tax exemption for low-income earners and free public transport in the countryside – and taking a blow from a deeply unpopular increase in alcohol duties forced through by the Social Democrats, Ratas moved to the, erm, centre for the remainder of his term, making every effort to be a leader for the broad cross-section of the country.

It wasn’t quite good enough. But he only had this one chance to be prime minister, and he’ll be damned if he doesn’t hold onto that seat by any means necessary. If the country screwed him, well, the country can get screwed, too. 

Sensible coalitions brushed aside

The post-election math meant there was no absolute winner – which is par for the course in Estonia – but there were two likely coalitions. The most probable one looked to be a Reform-Centre government; with just two parties holding a strong majority of parliamentary seats, it could be a stable partnership of moderates, and even a potential “coalition of unity”: one to make money and one to spend it, and by the late 2010s, Centre remained pretty much the default-choice representative of Estonia’s Russophone community as well. That one is rightish and the other is leftish was neither a problem nor a novelty (there was already a Reform-Centre cabinet from 2005 to 2007); there were some policy incompatibilities, but compromise is what coalitions do.

The other option was a return to the pre-2016 Reform-Isamaa-SDE teamup. Sure, there was some lingering bad blood on both sides, but Taavi Rõivas – the guy who was booted out of the Stenbock House (the official seat of the government of Estonia – editor) by the unlikely conservative-socialist teamup – was long gone from leadership. Reform is now headed by Kaja Kallas (the daughter of Siim Kallas).

It looked like Estonia, the eager poster child of Europe, would have simultaneously a female president (Kersti Kaljulaid was elected president in 2016 – editor) and a female prime minister. Heck, they could’ve gone for an elegant bit of statesmanship and offered the chairmanship of the Riigikogu to senior Centrist, Kadri Simson. Imagine the photo ops: Kersti, Kaja and Kadri – a blonde triumvirate and a bloody triumph!

Sure, the 19 cryptofascists in parliament were nothing to be happy about. But both Reform and the Social Democrats had said outright that they would not work with EKRE. Centre was not only a left-wing party (and, on traditional policy markers, farther left than the Social Democrats!), but also the party of Russophones; and just a few years ago Kadri Simson became the unlikely champion of Estonia’s (admittedly half-baked) Civil Unions Act (that allows same-sex couples to legally register their cohabitation – editor). Centre had nothing to offer or gain from the party of “Estonia First” (And Ban Abortions While You’re At It).

Except, that is, for the premiership.

A coalition of Centre, Isamaa and the neo-nazis brewing

Over the week following election day, Reform made overtures towards Centre first, then towards Isamaa and SDE. While the Social Democrats have now said they are happy to join Reform, the two others were oddly reticent to begin the horse-trading for policies and cabinet seats. And now we know why. In a highly improbable twist of algebra, it seems there is a new coalition brewing: that of Centre, Isamaa and the neo-nazis.

Or rather, I should say, a coalition of EKRE with Centre and Isamaa support (described in Estonia with an abbreviation EKREIKE).

There was a time, back in the 2000s, when Reform’s rejection of a possible coalition with IRL (the union of Isamaa and Res Publica, a once-mighty but quickly spent centre-right endeavour) was explained by Andrus Ansip’s fear of being the Prime Minister in a Mart Laar** government. If an EKREIKE coalition does happen, Jüri Ratas will keep the Stenbock House office he so treasures, but he will be no more than the figurehead of a Mart Helme (the leader of EKRE – editor) government.

Not everyone shares this opinion. They point at the True Finns (a milder version of EKRE in Finland – editor) over in the North and say a stint as a junior partner in government will drive EKRE either to the mainstream – or out of relevance. They will either move to the centre just like Ratas did – or disappoint their core voter base and lose most of their seats in the next election.

And maybe they would, indeed, end up going mainstream like the True Finns – if they had been brought in as a junior partner to someone like Res Publica (a former political party that won the parliamentary election in 2003) at the peak of its power. A radical far-right party supporting a centre-right PM, against what they perceive as a red onslaught, might indeed find that once the substantive part of their manifesto is implemented, the broad base of frightened and uneasy voters gets siphoned off and they’re left with nothing but the lunatic fringe.

Succumbed to unbridled populism

Here’s the thing, though: EKRE has nothing to lose. Its voters are not the economically dispossessed, like the working-class Brexiteers of the austerity-ravaged United Kingdom – Estonia’s economic growth continues, unemployment is low, salaries are growing nicely and even the inflation is under control.

Nor is EKRE the voice of a rightward swing of a Scandinavian Welfare State that is worried about uncontrolled government spending and the national debt – EKRE’s actual stated policies are a mix of taking out loans to hand out money to the people (as long as those people are ethnic Estonians – with the purity criteria defined by the EKRE leadership, natch) while getting rid of most taxes.

Nor is it the voice of those genuinely worried about security: EKRE’s geopolitical stance is to get Estonia out of burdensome international commitments like the EU (where, mind you, tiny Estonia is one voice out of twenty-seven, a position of power it could hardly hope for anywhere else; and if you don’t believe Brussels stands up for the interests of the small countries, ask the Irish!), and basically just assume that our safety is guaranteed by the personal integrity of Donald Trump.

And most certainly, the EKRE voter is not the same as the upper-middle-class gay men of Amsterdam who vote for Geert Wilders (a populist Dutch politician – editor), so that he’d protect them from Sharia law.

The EKRE voter is, at the most charitable end, someone who’s succumbed to unbridled populism. But Estonia’s economy is in great shape, whether you’re a software developer or a construction worker. And the migrant crisis on Europe’s doorstep has so far resulted in a grand total of two hundred people and change coming to Estonia. That’s less than a cruise ship’s worth (and many of those have already left for Germany, where salaries are higher, the weather is more tolerable and not every meal is pork).

If you’re seeing someone on a Tallinn street – outside of the Old Town or the Cultural Kilometre – who has an interesting skin tone, then they’re most likely doing a master’s degree at TalTech while simultaneously contributing a healthy amount of payroll taxes to the Estonian budget, dude.

Deluded voters

The EKRE voter may delude themselves into thinking they are standing up for Great Estonia, or that they are fighting back a resurgent wave of Communist terror (they like to call everyone who opposes EKRE a socialist and intend it as a terrible slur***). They might even tell themselves they are voting against a man who allegedly once stole ten million dollars from a failed bank (and end up voting for a man – an EKRE MP Jaak Madison – who definitely stole an iPhone on the overnight ferry to Stockholm).

But the EKRE voter is a voter who is miserable and the source of his misery must be somewhere else than himself. It could be the woman in his life who left him and took the kids (or had the temerity to make a choice to not have his kids). It could be the unelected Brussels bureaucrats****. It could be the boss who yelled at him the other day – that asshole of a boss with his fancy college education and his too-tight jeans, a sure sign that he is one of them gays. It could be the ISIS infiltrator who is just biding his time before he turns Võrumaa into a caliphate. Or, if all else fails, it’s got to be George Soros.

Estonian voters have a naturally elevated level of background misery; and let’s be honest, there’s also a fair amount of racism here. It’s almost impossible to grow up in a country where everyone looks like you and not feel uneasy around someone who doesn’t. You’re not a terrible person because you have a cognitive bias, you’re only a terrible person if you embrace it.

Estonia’s xenophobic streak has always been there – from jokes about six-toed Latvians to the expulsion of Baltic Germans after 1918, to the reason why that Tujurikkuja (an Estonian television entertainment show – editor) cover of Ei Ole Üksi Ükski Maa (an important Singing Revolution-era protest song – editor) is so paralyzingly hilarious.

Jüri Ratas is not a statesman

This is why EKRE has nothing to lose, and by having nothing to lose, it will control Jüri Ratas’s government. For three years, Ratas looked like a capable statesman, but it is now obvious that he cares more about his own position as prime minister than he does about the country. And EKRE can’t help but exploit that. Like the Northern Irish Unionists who are holding Theresa May’s government hostage in the UK, EKRE will hold Ratas hostage, dictating policies and threatening to go into opposition if they don’t get what they want. Because if it fails as a party in government, it won’t make its voters disappointed and dissatisfied with them.

As history teaches us, when the Great Leader fails to live up to his promises, it is never the fault of the Great Leader. It is only due to sabotage from the Enemies of the People. And so, the Enemies of the People must be hunted down and purged.

As for Jüri Ratas, history will not remember him as the man who made the minimum wage free of income tax. It will remember him as the man who put the neo-Nazis in power in Estonia.

P.S.: For an excellent in-depth political analysis of the situation, point your Google Translate at www.poliitika.guru/risk.

* Edgar Savisaar lost his grip on the Centre Party partially due to health issues and partially due to being indicted on corruption charges. At time of writing, his criminal trial was halted because he was found too ill to face the court. He was not acquitted.

** Mart Laar, two-time prime minister, was the architect of Estonia’s free-market economy and capitalist miracle. He is now also out of politics on health grounds, but even when his party did badly, Laar enjoyed what was probably the second-biggest reserve of personal authority after near-mythical president Lennart Meri.

*** Never mind that EKRE happily hosted Estonia’s pro-Kremlin fringe, under the logic that those guys also hate the LGBT community and that makes them fellow travellers.

**** Stay tuned; we’re electing our Brussels bureaucrats two months from now.

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The opinions in this article are those of the author. Cover: Mart Helme, the leader of the EKRE party (the image is illustrative).

Second pension pillar reform: the first meaningful campaign promise for 2019

The Estonian parliamentary elections are coming up in March, and the campaign promise season has just geared up with the first policy point worth talking about: the shutdown of the mandatory retirement savings scheme and the return of the money to the citizens – to invest privately or do with as they please.

The idea comes from Helir Valdor Seeder, the chairman of the former IRL (Union of Pro Patria and Res Publica), now rebranded back to just Isamaa – the same party that was behind the personal business account scheme. It touches upon two other peculiarities of how Estonians handle their money: the second pillar of the old-age pension system and the investment account (investeerimiskonto) scheme.

According to Seeder’s proposal, Estonians would be allowed to take the money in their second pillar funds and, if they wish, transfer them to an investment account – where they can make broader choices on how to invest the money or even withdraw it.

What is the second pillar?

The Estonian old-age pension system notionally consists of three pillars. The first is the basic state pension, provided to anyone upon reaching retirement age (currently 63 but rising to 65 by 2026), as long as they have been employed and paid taxes for at least 15 years. The monthly pay-out for this pension – which is somewhat variable – remains, unsurprisingly, not enough to have a respectable life as a retiree.

The second pillar is supposed to rectify this problem by introducing an element of mandatory savings for each individual person, to be paid out only upon their retirement. Two per cent of your gross salary (of the number in your employment contract) is paid into a special pension fund; this is matched by an extra 4% from the state, paid out of the social tax that your employer pays on your behalf (this is on top of the salary figure in your contract). These 6% of your monthly wages are then collected and invested, over your entire working life, by a commercial investment fund, usually run by one of the big Estonian banks. You can move the money between different pension funds, but you can’t take it out until you retire (or die, in which case your next of kin inherits the money – it doesn’t just go to the bank).

There is also a third pillar, a completely voluntary scheme where you can pay more money into your pension fund on top of the 2%+4%. Third pillar contributions are tax-deductible (up to a certain limit), but since you still can’t take the money out until you retire, it’s not popular.

What is the investment account?

It’s a special bank account (which, unlike the personal business account, actually exists and is offered by retail banks). It is designed to give private citizens the same advantage that corporations enjoy with Estonia’s zero corporate tax on reinvested profits.

Just as Estonian companies only pay income tax when they pay out the money in dividends, individuals can put money into an investment account and use it to buy stocks, bonds, shares in investment funds etc. When you sell those shares at a profit, the money goes back into your investment account and is not taxed – you can use all of it to buy more shares. When you withdraw money from the investment account into your regular bank account – only then do you have to pay income tax and only on the difference between what you put in and what you took out.

What is the problem with the second pillar?

There is competition between providers of second pillar pension funds (between banks), and each provider offers funds with different risk levels. They are run by professionals and they have fairly high administrative costs (taken out of the value of your savings). Still, most of them are actually quite bad at the job of investing.

The Estonian pension index shows the increase in the value of a share in second pillar funds of different categories – from EPI-00 (the average of conservative funds that do not invest in risky stock markets at all) to EPI-75 (the average of aggressive funds that can put up to 75% of their money into the stock market), we can see the return on investment is between 40% and 85%.

Over the same period, the consumer price index has grown by 63%. If you started saving money when the scheme was introduced (and it was mandatory for anyone born after 1983), then unless you were very lucky in choosing your pension fund – it’s not the highest-risk ones that have shown the best returns! – then your current second pillar savings are, in real terms, worth less than what you paid in.

Discounting the boom-and-bust of the 2008 financial crisis paints a slightly better picture – even the worst-performing index shows an increase of almost 27% since April 2009, while consumer prices have increased only 25% since then – but the average Estonian is still left with a very legitimate question: why am I giving my money to bankers who aren’t increasing its value?

In the last couple of years, this criticism has even resulted in a new non-bank player in the second pillar market: Tuleva fund, whose pension funds have smaller administrative charges and just follow the decisions of major market players, instead of paying the salaries of independent stock traders who aren’t good at their jobs. This, however, is largely cosmetic: Tuleva’s pension funds have also struggled to grow more than inflation in Estonia.

Is the investment account better?

Not necessarily. The most obvious way to use your investment account is to buy shares in the funds provided by the same bank that handles the account. The range of available funds is much broader than with the second pillar, you can choose funds other than your bank’s and you can even buy and sell individual stocks. You can buy and sell shares in Facebook or Ford.

But non-pension investment funds have also struggled to show growth that’s higher than inflation. And investing directly in stocks, you are at risk of actually losing your money. It’s certainly possible to make a profit in the stock market – but you have to pay a lot of attention, do a lot of research and treat it as a job. Which is a very different proposition from a passive investment to increase the size of your pension when you get old.

Is Seeder’s proposition a good idea?

Yes.

It’s certainly a populist move, but in this case, it will be popular because it genuinely makes sense. Everything comes down to effectiveness: the second pillar simply does not work. When it was introduced as a new payroll tax around 2003, it was supposed to be a way to make your pension big enough to live on comfortably when you retire – but this promise was always implausible and, fifteen years later, it looks just about impossible.

What happens if Isamaa gets enough votes to stay in government after the next elections and gets the coalition to make the second pillar conversion happen? It’s unlikely that a large proportion of Estonians will immediately become active investors, with stock tickers on the main screen of their smartphones. Most of them will probably go straight for withdrawing the full amount from their investment accounts (and paying income tax, presumably).

For the Estonian economy, it will be an instant and major stimulus in spending. For Estonian households, it could mean sudden access to a lump sum sufficient to, for example, make a down payment on a mortgage or reduce the outstanding loan by a significant amount. (Going from renting an apartment to paying down a mortgage on a home whose value is likely to grow? That sounds like a much better investment decision than a mediocre pension fund.) And once Estonians get active investment accounts, they are likely to pay at least some attention to active investing.

What will it mean for Estonia? On the one hand, it will prop up the real estate market, which has certainly recovered from the 2008 crisis and looks increasingly like another bubble – but mortgage interest rates are expected to start growing in the next few years, which is certainly a threat to Estonian homebuyers. On the other hand, a sudden influx of disposable income is likely to make inflation and consumer prices increase further – but Estonia is part of the eurozone and a bit of inflation is acceptable as long as salaries grow faster.

Furthermore, Seeder’s proposal is not just a one-time deal. The 2%+4% will still be collected – and can be converted and withdrawn in the future – making it a sneaky opportunity to increase take-home pay and reduce Estonia’s payroll tax burden, something that’s been a big subject of discussion lately.

The downside, of course, is that retirees will not have the benefit of additional pension pay-outs. How much of a difference will it make? Using NASDAQ’s pension calculator, we can take the example of a 30-year-old making Estonia’s average salary (€1,354, as of writing). Discounting both inflation and wage growth, over a 45-year working life this person will contribute around €44,000 to a pension fund. Assuming the investment banker will increase this to €60,000, it will give them €266 per month in extra pension pay-outs for 10 years after retirement. That’s not insignificant – but if it makes the difference between renting or owning a home, the trade-off could certainly be worth it.

Will it get Isamaa elected?

It just might.

Isamaa, Estonia’s moderate nationalist party, is currently a junior coalition partner with very modest ratings among voters. Elections are still many months away, but Seeder’s proposal is the only campaign promise so far – among any party – that is a meaningful policy proposition. The leftist Centre Party of the current prime minister, Jüri Ratas, has achieved little in two years in office; the economic-liberal Reform Party has a photogenic new chairperson but no ideas beyond criticising anything the Centrists do; the Social Democrats are saddled with the legacy of a highly unpopular increase in alcohol taxes. Isamaa’s main competitor for the conservative vote is the populist neo-Nazi EKRE.

It’s a long way to March of 2019, but by promising something genuinely new and helpful (as opposed to hateful), Isamaa is easily taking the lead.

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The opinions in this article are those of the author. The cover image is illustrative (Pexels).

PICTURES: The Tallinn Truck Show 2018

From heavily customised bulk haulers to vintage fire trucks, Scandinavia’s most impressive big rigs gathered to show off at the Tallinn Truck Show 2018.

Heavy goods vehicles are an invaluable part of the modern society – but in most of Europe, they are also easy to ignore. The continent’s highly efficient logistics industry and the demands of safety, pollution control and fuel efficiency make this bloodflow of commerce look rather anaemic, rolling along at a strictly limited 88km/h in the right lane before stopping for a mandatory rest break.

The enforced efficiency of the industry has not completely killed off the romance of long-distance trucking in the public mind, however. It may have been decades since we’ve seen a movie anywhere as popular as Convoy or Smokey and the Bandit (or, if you prefer, 1996’s gloriously trashy Space Truckers), but there is a reason why European Truck Simulator 2 remains an incredibly compelling and popular computer game.

Truck customisation is very much alive in the Nordics

Fortunately for Estonians, there is a corner of Europe where trucks still get to be interesting – and it’s right nearby. In the high north of Scandinavia, where distances are as long as the polar night, traffic consists largely of suicidal reindeer and the rules on the maximum length with trailer are not as strictly enforced, the culture of truck customisation is very much alive. Go past the densely populated areas of Finland, Sweden and Norway, up into the regions where lumber trucks haul high-value cargo, and civilisation depends on a steady supply of goods from days away, and you will be in the land where a driver’s rig reflects status and personality.

On a sunny July weekend, some of the best of these custom vehicles – at least, those not currently hauling twenty tons of milk and bread up to Kirkenes – made it just about as far south as they ever have any business to be: the Tallinn Song Festival Grounds.

Continuing the Americana vibe left behind by the open-air venue’s last occupants – the Guns’n’Roses concert production, which very much owes its success to the dedication of long-haul lorries – the 2018 Tallinn Truck Show was a boisterous celebration of a subculture that normally just quietly gets on with the job. Family-friendly, too: what kid is not thrilled at the opportunity to climb up into a real-life truck cabin and sit in the driver’s seat? For that matter, what parent is not thrilled to do the same in a rig that gives them the same sense of awe and wonder that any old Scania would have done when they were little?

From expressions of personality to celebrations of nationhood (including an #Estonia100-appropriate truck with the unmistakable Jüri Arrak paintwork), from firetrucks to race rigs, Estonian World brings you a gallery of highlights from the Tallinn Truck Show in 2018.

Gallery: Nostalgia for summer at the Tallinn Motor Show 2018

With above-freezing temperatures just around the corner, Tallinn’s Saku Suurhall hosted a motorcycle fair.

The powersports show, focussed mostly on two-wheeled fun, brought together exhibits from major dealers, including a few exciting new models unveiled for the 2018 riding season.

The Tallinn Motor Show competes with the longer-running Motoexotica show that marks the start of the wait for spring in Tartu; names aside, both shows are very much intended for riders from Estonia and nearby to get together and window-shop for new bikes and new gear.

Harley-Davidson’s eminently drool-worthy range of chromed cruisers competes for attention with Honda’s broad, practical range, including the brand-new version of their Gold Wing luxury tourer, as well as a new Adventure spec of their popular Africa Twin onroad/offroad bike. The latter is aimed squarely at an audience that was previously split more or less evenly between BMW and Austria’s KTM.

Beating Tallinn’s unbearable traffic jams

The Bavarians were here showing off several takes on their R Nine-T nostalgia bike, as well as the brand-new G310 GS, a cheap and lightweight entry-level model in their venerable adventure range. Meanwhile, KTM was displaying its full model line, including the brand-new 790 Duke, an exciting middle-weight street bike that is sure to be of interest to any urban commuter who thinks Tallinn’s traffic jams are finally becoming unbearable.

KTM-owned Husqvarna, meanwhile, brought out not only its well-respected super moto and dirt bikes, but also the Svartpilen and Vitpilen models – a chance to own a piece of high-concept moto design that is affordable and practical to ride every day. The European representation was rounded off with Triumph, the British brand that can easily compete with Harley-Davidson on heritage and history; and now it has proper dealer support in Estonia.

While neither Kawasaki nor Suzuki were represented at the Tallinn Motor Show, Yamaha was definitely here to represent the Big Four along with Honda. The Asian contingent was further represented by Benelli – an Italian name now used to sell Chinese-manufactured models, which undercut their more established rivals on price quite usefully.

It wasn’t not just about new showroom bikes, though, as the Tallinn Motor Show also included a display and competition for project bikes – unique custom models constructed by Estonian craftsmen over the winter, in addition to a big booth for Tallinn’s Renard Speed Shop.

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All images by Andrei Tuch.

Estonia’s personal business account is no tax miracle

The summer of 2018 will see the introduction of a super-simple tax regime for one-man businesses – but the details of it undermine Estonia’s reputation for clever and efficient solutions, Andrei Tuch writes.

When Jüri Ratas’s left-leaning coalition took over in Estonia a year ago, the most immediate and impactful initiative was a series of changes to the country’s famously straightforward tax code. But while changes to the income tax credit have generated a lot of confusion, another policy seems on the surface to be tailor-made for the sort of skill-based small businesses that the country’s e-residency programme is trying to attract.

The entrepreneurship account (ettevõtluskonto) is a new concept, a special type of bank account opened for an individual person with no corporate status. Any money deposited into that account is subject to an automatic deduction of 20% (up to a total of €25,000 a year, and 40% for anything above that). The deduction goes to the tax authorities, and then the state has no more questions to you regarding that income. If at least €1,300 a month comes into the account, you are even eligible for national health insurance.

The downside is that you cannot write off your business expenses – but a professional services provider, who rents out their time, knowledge and skills, the digital nomad from the e-residency recruitment posters, wouldn’t be put off by that.

Given that e-residency is an individual, not corporate status – starting a company as an e-resident is easy but not mandatory – the self-evident question is: can an e-resident open an entrepreneurship account? Looking at the law as written, it seems that the answer is yes (and curiously, this type of account can be offered by any bank in the European Economic Area, not just in Estonia). But when you start looking into the details of how operating under this regime would work, you soon find where the other shoe has dropped.

The key aspect is a small change to the Income Tax Act, saying that an invoice paid under this scheme is not a tax-deductible business expense. (It’s often said that Estonia has no corporate income tax, but that’s not quite true: the tax on distributed profits is kept equivalent to personal income tax.) So if an individual uses an entrepreneurship account to provide services to a company, the invoice amount is taxed at 20% on the company’s end, in addition to the 20% automatic deduction on the individual’s end.

The reason for this non-obvious provision is understandable – it is a safeguard against businesses “optimising” their payroll taxes by having employees just use entrepreneurship accounts instead of employment contracts. From the viewpoint of revenue base management, it makes all the sense in the world, it’s an elegant and low-maintenance solution for preventing tax avoidance.

An additional administrative burden

However, from the policy viewpoint, it massively diminishes the impact and value of the entrepreneurship account as a concept. This company-side tax is applied selectively – yes on services, no on sales of physical goods. But as the scheme pointedly does not allow the individual to write off any material costs, it was always much less useful for a manufacturing or trading business.

As a freelance, part-time provider of professional services – in my case, translation – my fixed costs are near zero. I am happy enough swallowing the amortised cost of my computer and the electricity it uses, if in return I get a hassle-free 20% tax rate instead of the usual payroll-plus-VAT of an invoice issued through a friendly translation agency.

(Currently, a net payment of €100 to me is approximately a €217 invoice to my customer. Whether the extra money would be a reduction in my rates or would go straight into my pocket, is for me to negotiate with my customers – but an economic boon in any case.)

However, this kink in the entrepreneurship account scheme not only raises the total tax wedge on professional services to something far higher than the headline figure, it actually creates an additional administrative burden on the paying legal entity. A pre-2018 transaction may come with a high tax burden, but it has the advantage of being very simple for the customer: pay the invoice and you’re done, no more obligations on your end, and you can write off the VAT. From next year, if I suggest to a customer that I invoice them as an individual using my entrepreneurship account, they have to get their bookkeeping to represent that money differently from every other business expense. Not to mention the lack of enthusiasm on the part of Estonia’s retail banks to invest in developing these new accounts – the law does not require anyone to offer them.

Because the business-side tax does not apply to sales/purchase transactions, we may see a resurgence of “optimised” deals where I, as a translator, sell to my customer a physical CD containing a text file, and the rights to the translation are included for free.

The tax is also not applied to transactions (of any kind) between physical individuals. This was the original impetus behind the scheme – a way to legalise payments for odd jobs, like fixing a broken pipe or doing some construction work on your house. But such transactions will remain essentially untraceable to the Tax Board, and since the scheme also does not allow the plumber/builder to write off the cost of his tools and materials, there is no incentive to use the account and pay any tax at all, instead of cash-in-hand work as happens now.

Nor is the scheme useful for invoicing companies outside Estonia. Yes, you could absolutely write a contract that says, “I am responsible for all my tax obligations stemming from the receipt of this payment”, but a cornerstone of e-residency is that profit must be taxed where it’s generated, not where the recipient is registered. Estonia has – rightly – been very careful to not turn into an electronic tax haven. If a German customer pays into your Estonian entrepreneurship account, Estonia might be satisfied with taking 20% off the top, but that doesn’t mean Germany’s tax authorities are done with you.

The entrepreneurship account scheme could have been the killer feature that made e-residency a lot more attractive – if not for its practical implementation. Alas, the real world strikes again.

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The opinions in this article are those of the author. The cover image is illustrative (Shutterstock).

Andrei Tuch: At the next junction, bear left

Estonia’s first left-wing coalition in decades has finally agreed on a plan of action. Andrei Tuch analyses its plan.

The country has enjoyed remarkable political stability since the turn of the century, trading in a proud post-restoration of independence history of never letting a cabinet serve from one election to the next with the exception of having, in Andrus Ansip, Europe’s longest-serving head of government. But that has not meant a lack of domestic political competition. Every recent coalition has been, to one extent or another, the product of a desire to keep out the leftist Centre Party and its populist chairman and Tallinn mayor, Edgar Savisaar.

The ever-present chief of the Centrists has been a master of political survival, even brushing off a leaked top-secret briefing about an operation by Estonia’s security services to prevent Kremlin-linked money from ending up in his party’s campaign coffers. But his hard-line management style had alienated much of the party’s leadership, and a series of personal issues – first a medical emergency that left him in a wheelchair, then an anti-corruption raid – led to him finally being ousted from the chairmanship in a Centre Party congress in the autumn of 2016.

Meanwhile, the market-liberal Reform Party seemed to become overly complacent in its status as the bulwark against Savisaar. Once the threat was gone, the other coalition partners decided they’d had enough of the uninspiring prime minister, Taavi Rõivas, and the likes of Jürgen Ligi, the often ill-advisedly plainspoken minister of many successive things. Rõivas refused to go quietly and was removed in a parliamentary vote of no confidence.

The coalition that replaced him, however, was a cause of great concern. Not only would it put Jüri Ratas, a Centre Party man, in the top job, but the other two parties are the Social Democrats, and the Union of Pro Patria and Res Publica (IRL). The latter is a nominally right-wing party of moderate nationalists, which has not been able to compete with Reform for the economically liberal, small-government vote, and has instead dabbled with a more family-oriented conservative ideology.

Despite having almost as many parliamentary seats as the other two parties combined (27 vs 15 and 14), the Centre Party does not dominate the government – the only vital portfolio it retains apart from PM is the ministry of economy and infrastructure, held by Kadri Simson, the leader of the party’s internal renewal faction.

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A leftist cabinet is unknown territory and a potential threat to Estonia’s flagship political achievements – the balanced budget and the simple, flat taxes.

After days of private negotiation and public speculation, the coalition has finally published a document that will guide its activities until the next general election in 2019. While we encourage you to go and review the full text yourself (especially if you are an Estonian voter and/or taxpayer), reading political manifestos can be a boring and difficult challenge – which is why Estonian World has done it for you. Stripping out the expected, the common ground and the conciliatory fluff, this is what’s important.

The bear in the room

One of the major problems with the Centre Party is that it has historical links to Russian authorities – even before the campaign financing scandal, it had a cooperation agreement in place with United Russia, which forms Vladimir Putin’s mechanism of power. This helped court the vote of disaffected Russian speakers, especially the non-citizens who can vote in municipal elections, and have consistently kept Savisaar in the Tallinn mayor’s seat.

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In conversations with the press, Ratas was quick to distance himself from United Russia: while it was not practical to go through with the paperwork of an official termination before a new cabinet was sworn in, the PM stated unequivocally that the agreement was “frozen”.

Presumably the other coalition partners were skittish – particularly IRL – so the manifesto has clear language maintaining Estonia’s place firmly in the pro-West, anti-Russia camp:

Estonia supports (…) protecting the sovereignty and restoring the territorial integrity of Ukraine. The sanctions against Russia can only be alleviated when Russia returns to the generally accepted principles of international law.

(…)

We support the strengthening of NATO’s deterrence measures and the continuous military presence of the allies in Estonia.

The document also retains Estonia’s conciliatory stance towards the UK. National defence is still dependent on NATO rather than any vague future plans of an EU army; Britain is a key player in it; and there are other European institutions better suited to playing bad cop over Brexit.

On the domestic security front, interesting commitments include moving the main police academy to Narva, and introducing Scandinavian-style income-based fines for drunk driving.

Show me the money

The big worry was the economy. What will a left-wing coalition do to people’s taxes and the state’s finances? In the event, not very much. A fundamentally balanced budget is enshrined, and one year’s surplus can be spent next year as long as the total difference does not exceed half a percent of GDP.

For a long time, one of the Centre Party’s ideological tentpoles has been the introduction of a progressive income tax rate. Instead, what the coalition means to introduce is a regressive income tax deduction. Estonia’s personal income tax has never been entirely flat – the first little bit of money you earn every month is free of income tax entirely.

Now, that level will be raised from €175 to €500.

But for anyone whose income exceeds the national average (€858 net, as of summer 2016), the deduction will start to fall – at €2,100 per month gross, the deduction disappears entirely.

The upshot is that low earners will keep more money – someone currently on a 500-euro wage will take home an additional €80 per month, which can be a big help. High earners will lose less than €40 per month, at most – out of a take-home sum of over €1600.

There’s still the question of how this will affect collected revenues and how the government intends to patch a hole in the budget, but it’s not a high price to pay for social solidarity.

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Remarkably, the manifesto’s economic section also promises to scrap joint tax filings. Previously, incomes for purposes of this deduction could be added up across a household – a single-earner family could claim against both spouses. This will be expressly prohibited now. Because it only affects the basic tax-free level, it has always been more relevant to low earners; but with the massive increase in the deduction, it would be unreasonable to let a family of four have €2,000 worth of untaxable income a month. On the other hand, support payments for families with three children or more will increase.

While changes the income tax rules will require a change to legislation and so won’t happen immediately, the coalition did announce that for 2017, it will cancel an expected reduction of half a per cent in the rate of social tax (which, at 33%, is paid by the employer on top of the gross salary figure in someone’s contract). This is an executive decision rather than part of the coalition manifesto, but it’s worth mentioning to close out the topic of payroll taxes.

juri-ratas-photo-by-raigo-pajulaCuriously, the left-leaning coalition’s plan also includes some highly business-friendly provisions. It’s often touted that Estonia has no corporate tax on reinvested profit, but profit does get taxed when it’s paid out in dividends – traditionally at the same rate as personal income tax. Now that rate will fall from 20% to 14%. While there are some safeguards in place to prevent abuse (such as CEOs invoicing their companies for “management services” rather than drawing a taxable salary), it might have the effect of stripping the economy of long-term investment capital at the expense of increasing short-term tax revenues.

Another bit of small business stimulation is the “entrepreneurial account”, an idea previously floated by finance minister Sven Sester (IRL) and dismissed as a corner case with few real-world applications and a negligible economic impact.

A popular measure will be the simplification of company car usage. Currently, it’s a cumbersome affair requiring constant paperwork; the coalition manifesto promises to replace it with a tax that depends on the car, not how much it’s used for private purposes. Offering a company car may now become cheaper than offering a salary increase that would cover that car’s private lease payment.

In addition, the manifesto promises to introduce a new one-time registration charge on cars. Estonia has no annual car tax, but the change-of-ownership and registration fees have traditionally been hiked every time the budget needs more revenue. For both of these car-related issues, however, the manifesto offers no hard numbers.

In a similar revenue-boosting measure, the government intends to set a new tax on sugary drinks, increase the excise on beer, and introduce a bank levy, although it’s unclear what form it will take.

Finally, the manifesto envisions selling off shares in certain state-owned enterprises (including the Port of Tallinn, fresh from a mishandled takeover of the ferry routes to major islands), and setting up a special committee for nominating state-representative directors to corporate boards – previously the purview of ministers.

Learning the lesson

The only interesting statement in the governance section of the manifesto is a promise to get rid of county governments, switching over their functions to municipalities. This comes on the heels of a movement for rural municipalities to consolidate into larger entities.

The education section features a bit more specifics, however. Free school lunches will be provided to all children, and their funding will increase slightly. There is also a provision to bring the median salary of teachers to 120% of the national median before the next election. Not only is this good for teachers, but it’s a generally positive sign that political promises are now given in terms of the median, not average, salary.

The manifesto’s integration section also has a provision for “pedagogically justified flexibility in language and content learning”. This was seen with alarm by some as an attempt to reintroduce fully Russian-language school education by the back door. But as at least one IRL parliament member was quick to clarify, it applies only to specific pilot projects in alternative learning and comes with an obligation for the school to achieve a higher proficiency in Estonian among its students than current mixed-language transition schools have.

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The same section includes specific promises to introduce free Estonian-teaching centres for adults in Narva and Tallinn. While Estonian language courses used to be widely available, the integration programmes that reimbursed their costs have been wound down recently.

The social policy and health-care section has non-committal provisions for strengthening the First Pillar of the pension system (the guaranteed state pension), as there is increasingly no faith or trust in the savings and investment-based Second Pillar. What’s missing from this section, however, is any language addressing the main problem of Estonia’s health care system – the staff drain, with medical school graduates and established doctors preferring to move to Scandinavia for higher wages and better working conditions.

It’s also worth mentioning an executive decision by the government – although it’s not in the manifesto – to reintroduce state subsidies for private schools. The argument against subsidies is that they produce elite schools, which are able to supplement their budgets with parental and alumni donations and thus reinforce social inequality from a young age. The argument in favour is that even religious or alternative-learning based private schools in Estonia are bound by the national curriculum; in practice the private schools often include special-needs institutions; and the law, as written, only allows targeted subsidies for teacher salaries and school building utilities at the same level as municipal schools.

In the environment sector, there is a specific commitment to reach a renewable energy source level of 50% for electricity and 80% for home heating by 2030 – but, of course, that’s not a commitment the current cabinet will have to fulfil.

Two years to make it work

What the cabinet will need to worry about, however, are the next parliamentary elections – coming in 2019, immediately after voters see their first tax returns according to the new system. Not only does the coalition need to keep the people happy, but Ratas and Simson will face the challenge of motivating Centre Party voters without the cult of Savisaar.

Estonian World will be here to tell you how they attempt to do that.

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Cover: Estonian prime minister Jüri Ratas (courtesy of Facebook.) The opinions in this article are those of the author.

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