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Banking Union: Corporate income tax may only be a temporary measure

Банковский союз: налог на прибыль предприятий может быть только временной мерой

The Estonian Banking Association believes that the problem of additional financing for defence investments could be solved by introducing a two percent income tax, which all companies could pay over the next two years. Taxes. Illustrative photo Taxes. Illustrative photo Photo: Tiko Aramyan/Shutterstock

The Estonian Banking Association believes that the problem of additional financing for defence investments could be solved by introducing a two percent income tax, which all companies could pay over the next two years.

"As there is currently no other alternative for financing defence investments, of the options currently proposed, banks support the introduction of a temporary 2% corporate income tax for all companies," noted Kadri Kiisel, head of the Estonian Banking Association, adding that there is not a single good tax option today.

“In our opinion, compared to other proposed alternatives, the corporate income tax best takes into account the real ability of enterprises to contribute to national defense, has the least impact on enterprise investment in the economy, and is the most comprehensive, transparent, and fair,” Kiysel added.

In its coalition appeal, the union writes that a stable tax environment is a value that every member of society should uphold. However, the geopolitical situation entails an urgent need to increase spending on national defense.

If no alternative to tax increases can be found, it is important that additional taxation of corporate profits be temporary, widespread, evenly distributed across the economy and as simple as possible to administer.

"We understand that additional investments are needed to ensure security and that businesses must also contribute. However, we are convinced that a strong economy based on viable businesses is the most likely to replenish the treasury," Kiisel emphasized.

"Raising taxes does not stimulate the economy, although in the short term it may seem that it will help solve the problem. In the longer term, the additional tax burden is more likely to contribute to inflation and with it further tightening of policy, reducing the prospects for a quick economic recovery," Kiisel explained.

Unlike share or balance sheet taxation, a temporary corporate income tax will not hit different sectors disproportionately.

However, in both cases, the additional tax burden would unfairly affect capital-intensive companies, including the technology and financial sectors, as well as energy, manufacturing, infrastructure, retail and real estate.

This, in turn, will hinder foreign investment and the activities of holding companies that do not have significant income but have a large number of assets on their balance sheets, according to the Estonian Banking Association.

“Asset-based taxation will not be equal across businesses, but will burden them very selectively, collecting a third of the expected additional tax revenue from only 18 companies and more than half from 200 businesses,” Kiysel explained.

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