According to the analysis by the Tallinn-based Sorainen business law firm, Estonia is missing out on an average of €145 million in VAT a year from foreign online shops that fail to pay the tax in the country; the experts behind the analysis recommend the Estonian government to pass immediate legal amendments to tackle the enormous tax loss.
Sorainen analysed how to tackle the tax loss arising from non-compliance of foreign e-shops in Estonia at the request of the Estonian E-Commerce Association. Its analysis revealed that the tax loss is caused by insufficient legislation that, among other things, does not enable the Estonian Tax and Customs Board – known as the MTA – to carry out an effective audit and enforcement procedure towards foreign e-shops.
“Even if someone has the information, for example, when commercial banks report data to the Bank of Estonia – even if the data exists in a personified form, neither the central bank nor payment services providers can surrender it to the MTA because of tax secrecy. In other words, there are no legal levers with which to make sure the tax board gets the data it needs for collecting unpaid taxes,” Allar Jõks, a partner at Sorainen, said, according to the law firm’s blog post.
While many foreign online shops fail to pay VAT, online shops registered in Estonia must pay VAT on purchases done by customers abroad, and VAT is due in the country where the purchase is done once a certain cross-border turnover exceeds €10,000. As such, the foreign e-shops need to pay VAT to the Estonian government on the sales done to Estonia, should that threshold be exceeded. However, many foreign online shops fail to do so, which gives them a competitive edge, being able to offer lower prices on the account of lower VAT rates.
Possible solutions
Sorainen said its specialists see an amendment to the Estonian Bank Act as the fastest solution to the problem. “The change should be made so that the Bank of Estonia is allowed to share certain specific data about e-traders with the Tax and Customs Board.”
“Should there be barriers to the domestic exchange of tax information to the Bank of Estonia and such a one-point-data-collection approach is not doable, Estonia should go in line with the EU regulations and foresee similar obligations for Estonian payment institutions. The latter provides that e-commerce data should be freely available to concerned parties from 1 January 2024. As the tax loss is significant, there is no reason to wait until that time,” the law firm said.
