According to the 2021 International Tax Competitiveness Index, compiled by the Tax Foundation, an American think tank, Estonia has the most competitive tax system among the countries of the Organisation for Economic Co-operation and Development.
Estonia ranks first overall on the 2021 International Tax Competitiveness Index, the same as in 2020, and for the eighth consecutive year, the Tax Foundation said.
“Estonia’s corporate income tax system only taxes distributed earnings, allowing companies to reinvest their profits tax-free,” the think tank listed as one of the strengths of the Estonian tax system.
“The VAT applies to a broad base and has a low compliance burden. Property taxes only apply to the value of land,” it added.
Among the weaknesses of the Estonian tax system, the think tank said Estonia had tax treaties with just 58 countries, below the OECD average – which is 75.
Latvia second for adopting Estonia’s corporate tax system
“Estonia’s territorial tax system is limited to European countries. Estonia’s thin capitalisation rules are among the more stringent ones in the OECD,” the Tax Foundation pointed out as other weaknesses.
“It’s a pleasure to see that the Estonian corporate tax system – according to which companies only have to pay income taxes when they take the profits out – is still finding recognition,” Helen Pahapill, the vice chancellor for tax and customs politics at the Estonian finance ministry, said in a statement.
“Effective and relatively simple profit taxing system has been one of the strengths of our small economy. The fact that the state doesn’t collect taxes when a profit is made has been helping companies survive tough times,” Pahapill noted.
The second in the 2021 International Tax Competitiveness Index is Estonia’s southern neighbour, Latvia, and one of its strengths is the fact that Latvia, too, adopted a similar corporate tax system as Estonia.
A competitive tax code keeps marginal rate low
New Zealand is ranked third, Switzerland fourth and Luxembourg fifth. Lithuania comes sixth, Sweden eight and Finland fifteenth.
The International Tax Competitiveness Index seeks to measure the extent to which a country’s tax system adheres to two important aspects of tax policy: competitiveness and neutrality. A competitive tax code is one that keeps marginal tax rates low, according to the think tank.
The Tax Foundation is a Washington, DC-based right-leaning think tank, founded in 1937 by a group of prominent businessmen to monitor the tax and spending policies of government agencies. It collects data and publishes research studies on tax policies. Its stated mission is to “improve lives through tax policy research and education that leads to greater economic growth and opportunity”.
The Organisation for Economic Co-operation and Development is an intergovernmental economic organisation with 38 member countries, founded in 1961 to stimulate economic progress and world trade. Estonia has been its member since 2010.
Cover: A tax report prepared online in Estonia. The image is illustrative. Photo by the Estonian Tax and Customs Board.