President of Estonia (2006-2016) Toomas Hendrik Ilves explains how Estonia got to the point where it has an e-tax system that can be considered world’s coolest and simplest: “Estonia’s success comes in two parts. Estonia was the first post-commie country to adopt a flat rate income tax in 1994, adopted later by a number of countries as well. A simplified tax system led to a major boost in compliance even with a paper-based system. The second step was to offer digital filing of income tax, which turned filing into 3-5-minute operation, since all taxable income as well as deductions were pre-filled,” says Ilves. “Today 98+% do their taxes online and actually have since the early 2000s.”
99+% of declarations done online
In Estonia, income has been declared electronically since 2000. Although in the first year, only 3% of people used the opportunity to submit their income digitally, it grew rapidly in the following years. The e-tax system was so convenient, easy and fast, that using it quickly became a rule, not an exception. The e-declaration had come to stay. So far this year, 99+% of income tax declarations have been submitted digitally.
One of the world’s fastest processes
In Estonia, it takes about 3 minutes to file taxes as a physical person. And that’s it – really. Everything is prepared and prefilled: your incomes, taxes that have been paid by your employer on your behalf, the training costs for you and your family members, your mortgage interests, etc (that can be used for deductions). If some of the data, such as income from selling stocks is not on the declaration at first, it can be added in just a few clicks from your online bank (the use of which is as common as declaring taxes online, with 99+% of bank transactions also taking place online).
This year, in just the first two days, about 324,000 people had filed their declarations, which is a four-year record. By the morning of February 25th, 483,000 income tax returns had been filed, which means 65% of all expected declarations were completed within just 10 days.
On February 26th, Estonian Tax and Customs Board will start refunding overpaid personal income taxes. It is just 12 days after the income tax filing period started.
According to Estonian Tax and Customs Board, 152 million euros is to be recovered and 12 million euros to be repaid. “In addition, from last year, overpaid income tax can be donated, and 2,500 people have used this opportunity in the amount of 104,000 euros,” Grete Urbel, service manager of personal income and taxation at Tax and Customs Board says to Invest Estonia.
Estonia has the best tax system in the world
For the seventh year in a row, Tax Competitiveness Index 2020 has ranked Estonia as the world’s best tax system. Estonia has no corporate income tax for reinvested profits, no capital tax, and no property transfer taxes.
When could the rest of the world catch up with the Estonian e-tax system and what is stopping them from doing so? According to president Ilves, digitizing of course would be the logical step — with pre-filling of income and deductions by the tax authorities. “This, however, requires digitization of the entire tax system, including employer filing of payrolls,” Ilves notes. “While Estonia has a flat-rate income tax, it would not be overly difficult to digitize graduated income taxes. I suspect the main problem is that digitization of government services in general is slow public acceptance and the absence of a secure digital identity underlying Estonia’s system.”
Simple and online tax declaring for companies
From the very beginning of e-taxation in Estonia, it has been possible for companies to submit their declarations online as well. From year to year, this process has become more convenient.
It has, for example, been understood by the state that in today’s world, flexible and hybrid solutions are needed to keep the level tax compliance high. One of Estonia’s recent tax innovations, aimed at promoting an entrepreneurial mindset among those not owning a company or not being registered as a sole proprietor (yet) but still occasionally offering services or selling goods for profit. “With the help of a business account, individuals selling services or goods can conveniently pay taxes on the earned income,” says Külli Külm-Kivistik, the Service Manager of Income and Social Tax compliance at Estonia’s Tax and Customs Board. “This means that you don’t have to worry about employment registration, financial statements and monthly tax returns if you engage in business activities just once in a while.” As of the end of last year, there were 3,470 active business accounts in Estonia and the number is growing.
For limited companies, tax compliance is almost as simple, preparing and paying taxes in Estonia taking up five times less time than world average. According to Külm-Kivistik, the process of tax compliance for companies is quite seamless for Estonian companies in most cases, with the company’s accounting software just submitting all the needed data over Estonia’s secure e-backbone, the X-Road, to the Tax and Customs Board’s server (in addition, there are some alternative ways for forwarding the data, if for example, a suitable software solution is not in use yet). If the declaration is in order, the Tax and Customs Board automatically confirms it – and that’s it! No ques at tax offices, no unneeded bureaucracy.
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.