When managing director of the e-Residency programme, Kaspar Korjus, asked me to present a short overview of the possible economic risks involved in e-Residency at the President’s round table, I did not have to think twice. Two days is not enough time to prepare an in-depth analysis, but enough to put together a comparison of the economic health of e-residents’ and local Estonian companies.
But some days just kick off with a row of unfortunate coincidences – so that Mr Murphy and the capital’s traffic left me, the naïve South-Estonian, impossibly late for the President’s e-Residency 2.0 round table. As I was late, I assumed the role of the polite audience and will publish the graphic examples and specific solution proposals not expressed at the round table here in this article.
Our economic environment, the backdrop to e-residents’ activities
We know that the fiercer the competition, the stronger the pressure on companies to develop, and development is the only way to grow. But we also know that there are some unfair players on the market and their influence can be devastating. The creditors lose, the taxman loses, and the whole society loses.
Tax deficit ‘only’ 700 million euros
The taxman has announced that today, tax deficit is at a record low – only 500 million euros in undeclared taxes. Let me add that tax arrears are at an all-time low – ca 200 million. A lump sum of 700 million that the state did not get.
Today I do not yet know what it means to be a millionaire, with obligations to match those of the Estonian government, but a hole the size of 700 million euros in my pocket. But I do know for sure that this hole has been significantly stitched up by the Tax and Customs Board’s impressive feats, such as declaring invoices that exceed 1000€, the employment register, and publicising paid taxes. These major improvements have had a decidedly positive effect on competition.
Tax liability or tax injustice?
If the taxman could put a stop to tax advantages of permanently insolvent companies, it could distinctly reduce the 200 million tax arrears (the state’s anticipation) and indirectly would help ground credit risks of entrepreneurs.
By permanently insolvent companies I mean companies that do not submit annual reports and have constant and/or accumulating debt. If they are VAT-registered, they have the right to earn revenue whilst not meeting their obligations to their creditors.
Our VAT system only works on the assumption that everyone with a turnover and issuing invoices actually get the money they are due – money from which they will give their share to the state. But if you do not get the money from the buyer, it does not reduce your obligation to pay 20% VAT on the same money that you did not get.
So the taxman – fully aware that the larger portion of taxes will not be paid by insolvent VAT-registered companies – make their smaller portion of taxes from the honest entrepreneurs, in essence punishing them for being good and proper.
In this situation, it would be fair to pay back the entrepreneurs the VAT they have paid on such transactions, to alleviate the damages done to them by ill-meaning debtors. If the tax office makes its 20% of tax revenues through the transaction partners of insolvent companies (creditors), then the poor creditors face losses from both the VAT and the whole transaction.
The taxman should have the same duty of care to conduct background research, as is obligatory for entrepreneurs. It means that a company that is insolvent or chronically has tax arrears should lose their VAT liability (which is a VAT right at the same time) ASAP. By enabling VAT liability, the taxman with its know-all-see-all reputation sends out the signal to the market: ‘This company is OK by me, I trust it with VAT liability, so You can trust it and give it credit!’
Health indicators of Estonian entrepreneurship
Launches. When in 2008, 1,000 companies were set up each month, all in all 12,000 a year, then now a decade later 25,000 companies spring up in a year. Our entrepreneurship has become project-based and this trend is on the rise, year after year.
Life cycle. Most, namely 2/3 of the companies only exist for 3-6 years, before 90% of them face compulsory dissolution. On average, 1,000 companies a month are deleted from the e-Business Register, because they have not submitted their annual reports for three or more years. Only about 100 companies are deleted via official proceedings – liquidation, bankruptcy or merger.
Unmet obligations. At the moment, 37,000 companies have not submitted ca 100,000 annual reports (these statistics do not include not-for-profit organisations).
In 2017, officially 77 million euros worth of debts were written off in the course of compulsory dissolutions. Unofficially, the sum must be several times that.
Chronic diseases. The phenomenon of using straw men is also blossoming and in the wake of GDPR these fronts have the nerve to request all data about them to be deleted, and then in hiding feel even safer to act. I admit that these straw men have declared war on Inforegister and we have no other option but to accept the challenge. We have invented an effective cure for this illness, but more about that in future articles.
Read more below about what emerged in the comparison of e-residents’ and local companies, and also about what business without monkey business is.
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