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Estonian simplicity, American complexity: A tale of two very different tax systems

Global pandemics. Insurrectionist mobs. These are bad things. But if you ask Americans what they are really worried about at this time of year, they will tell you. Filing their taxes.

Yes. For Americans, this most burdensome of pastimes has generated its own kind of folklore. People trade tips on how to save receipts, or share advice on tax preparation services. For those abroad, the system seems so complex many avoid it altogether. In conversations with fellow expatriates, I have learned that some haven’t filed returns for decades, while others claim they do not need to, under something called the foreign earned income exclusion, which means as bonafide residents of another country, they only have to pay tax on income above a certain threshold. According to others, they still have to report that income even if they won’t be taxed.

Those in the know typically work with professionals at a considerable cost.

85 pages of paperwork versus pre-filled online version

“My US return is around 85 pages long, costs me around €1,000 to file, and is a big pain in the ass,” concedes Scott Diel, a Kansas native, freelance writer, and fly fisherman, who has been living in Estonia off and on since the Nineties. “The US tax regulations are so complicated for Americans abroad that I bet that fewer than half US citizens abroad are properly filing.”

The experience of David O’Brock, an Ohioan by birth, longtime Estonian resident, and seasoned veteran in the rare metals industry is similar. “Last year, I paid just over $1,400 for someone to prepare my taxes because it is complicated,” he says. It is more complex if you own a business abroad, he notes and may require multiple filing, depending on how much money is involved. “It’s quite a lot of money just to do the preparation for those filings.”

When asked if he has had similar experiences with Estonia’s e-taxation system, O’Brock laughs. “No,” he says. “Three and a half minutes and I’m out.”

Compex versus simple

That has been my experience as well in the past few weeks. While I was compiling the information relevant for my US tax filing, sorting through documents and invoices, I received a prompt from my bank online about making my Estonian tax declaration, proceeded to the site of the Estonian Tax and Customs Board (EMTA), and was guided through the process of making my declaration. After briefly reviewing the data, I confirmed it and that was the end of the story. The process was over before it even started. My tax refund was deposited directly into my account.

I am not sure how long it took. It might have taken three and a half minutes, or two or four. As an experience though, it is as distant from paying US taxes as Tallinn is from Washington, DC.

According to Sander Aasna, area manager at the Estonian Tax and Customs Board, the simplicity of Estonia’s e-tax system can be deceiving, and there is actually a lot of backend preparation work that goes on behind the scenes to make each tax season a streamlined success.

EMTA works with different parties, such as public sector institutions, to obtain data from payrolls, insurance payment data, as well as other information on other benefits and expenses, Aasna says.

It also liaises with banks to obtain mortgage interest and investment data. “One of the important parts of our service is the pre-filled information, which we provide to the customers when they start filling their declaration,” he says. “This enables us to provide quick declarations because most of the information is already there.”

‘It went viral quickly’

It’s important to note that Estonians have not always had these kinds of tools at their fingertips. Two decades ago, they would have to travel to stand in line at 15 different tax authorities across the country. “It was pretty complicated to fill out the declarations on paper,” says Aasna, “and the returns were slower as well.” It was also a particular challenge for Estonia, half of which is covered by forest, and, as anyone can attest, subject to difficult weather. When wireless internet became accessible across the country, the EMTA decided to create a completely new way of managing taxes in Estonia. “We didn’t have any examples from other countries, as it was all done on paper all over the world,” says Aasna. “It was quite similar as it is today in many countries.”

Estonians were quick to embrace the new online tax solutions though, and acceptance was also a part of the success of the e-tax system. “If you look at the acceptance from the customer side, it went viral quickly, people really appreciated the possibilities, and they didn’t want to stand in line anymore,” says Aasna. “One of the reasons why it was welcomed so well was of course the thing that they were getting their tax return quicker and faster than ever before,” he adds. “This was one of the key elements, but of course comfort and simple service was also appreciated.”

The customer is always right

In interviewing Aasna about Estonia’s e-tax system, one word continued to catch my attention: the customer. He refers to taxpayers as customers and sees the EMTA’s e-tax solutions as a service.

“We want to take all the hassle and all of the complexity [of declaring taxes] on ourselves,” Asana notes. “We want that customers would have the most simple, easiest, most convenient service they can get,” he says.

It can be a different mentality from, say, dealing with the US Internal Revenue Service, which Andy Coleman, a certified professional accountant from Kansas who lives in Tallinn and helps many expats with taxes, knows well. “When you call the tax authorities here, they are nice and helpful,” says Coleman, “but, especially now, it is hard to get a hold of someone at the IRS. You have to call at a certain time so that you don’t have to wait hours just to talk to a human being. The tone and perspectives are different.”

According to Aasna, the EMTA’s willingness to do the work pays off though, as more taxpayers are willing to be compliant. “We strongly believe that if we succeed and if we provide simple and easy services to customers, they will have a positive experience and it will raise their willingness and readiness to declare and pay their taxes willingly,” he says.

No more interaction needed

EMTA continues to innovate too. The authority is working intensively with private sector partners to create new mechanisms for data sharing, as well as new tools to make the tax declaration process as simple as it can be.

“The next step for us is to make it even more automated,” says Aasna. “Our vision, our dream is to achieve this.” One envisioned tool is tentatively called My Income and will allow users to track their tax obligations over time and preconfirm data so that when the deadline arrives for tax declarations, they might not have to do anything at all.

“We will just send you an overview of the declaration,” says Aasna. “If you don’t want to change anything, you don’t have to. That way we will have silent consent,” he says. “For some people, declarations will be fully automated. There will be no more interaction needed.”

EMTA is also planning more services around life events, such as having children or becoming unemployed. “So that when you lose your job, the government will proactively provide you with services and benefits,” says Aasna. “Or when you have a child, the whole process will be initiated providing benefits, services, and reminders.”

The difficulty of legacy systems

Aasna says that EMTA has had visitors, including those from the US, that wish to learn from Estonia’s experience. Yet there are many obstacles and challenges to implementing Estonian solutions elsewhere. “It’s a big ecosystem,” says Aasna of Estonia’s e-tax system. “You have to have parties involved from the public sector, the private sector, and citizens have to be ready as well.”

He notes that Estonia’s encrypted digital identity documents play an important role because it allows the EMTA to authenticate users’ identities remotely. “We have a unique digital footprint we can use to identify the person behind the computer,” says Aasna. “Many countries are missing this part. You can’t have a solution in place if you don’t have the e-ID infrastructure.”

He attributes Estonia’s agility in crafting and delivering e-tax services to the country’s lack of legacy tax systems when it regained its independence in 1991. “We didn’t have this kind of big legacy system that needed to be changed,” says Aasna. “This is an advantage compared to the US, Germany, or any large other economy,” he says. “But it is possible. If there is the will, everything is possible.”

In regards to the US though, e-tax solutions might just be part of some future solution, as Diel argues. “You can already file [taxes] electronically in the US,” he says. “The complicated tax code is the problem.” Coleman for his part organizes seminars in Estonia from time to time to keep Americans up to date as to their evolving obligations to US tax authorities. He notes that expats are also uncertain about how and when to report income earned to Estonian authorities. “This indicates that there is some level of unclarity on the Estonian side too and also might not be enforced by EMTA,” he says.

Banks around the world, he notes, are obligated to send data on US citizens to the IRS, regardless of residence. “Things are becoming more transparent, data is being shared,” says Coleman. “They aren’t just after big fish either, they are after everyone to be compliant,” he says. “Some think that just because they are outside the US, they don’t have to worry,” he adds. “That’s not true at all.”

According to World Bank, the time that is needed for companies to file and pay taxes annually, is one of the world’s shortest in Estonia. You can see a comparison below – how much time you would save if your company paid taxes in Estonia.

  • The field is automatically filled based on your location but you can change it manually, if needed.
  • Data by World Bank, Doing Business project, 2019

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