According to Airi Lepassar, the ETCB's income tax risk manager, these cases are mainly related to income tax liabilities arising from concealed movement of companies' profits, but also from errors in the calculation of dividend tax exemption and contributions to and payments from equity. “We have imposed the record level of income tax as a result of contacting around 800 legal persons, almost a third of which have had to correct their tax data,” Lepassar said.
The biggest irregularities identified have been deliberate schemes aimed at obtaining a tax advantage. For example, transfer pricing regulations have been abused, profits have been moved to a group account on preferential terms, or loans have been granted to parent companies on preferential terms. Moreover, restructuring of companies has been used to move out profit, thereby attempting to create a right to tax exemption.
Cases where companies knowingly use cross-border schemes to obtain the right to tax exemption on dividends continue to be discovered. “For example, in order to ensure that the sale of a company does not generate profit in Estonia, where its payment is taxed, intermediate companies are established in countries where the sale of shares is exempt from tax. Furthermore, mistakes are made upon declaring non-monetary contributions to equity, when the value of equity is increased disproportionately and consequently also the right to exemption. Errors are also made in interpreting the tax law regulating the contributions made with assets in the course of a division - under commercial law, contributions to equity are made, but this does not give rise to the right to a tax exemption," Lepassar explained.
“It is strange that schemes for which case-law exists continue to be used to obtain a tax advantage. With the support of risk analyses, such schemes will sooner or later attract our attention, for example through tax declarations TSD and INF 14, but also through annual reports, register entries and documents submitted to the commercial register," said Lepassar.
In addition to deliberate fraud, companies also make many mistakes that are likely the result of ignorance. Such errors are related to the repurchasing of one’s own shares. “It is often not known or acknowledged that, under tax law, income tax is payable on payments made in an amount that exceeds the contribution to equity. For example, in the first half of the year, we have identified 44 such tax accounting errors," Lepassar said. Following intervention by the ETCB, nearly 748 000 euros of income tax have to be paid additionally due to such errors. The ETCB also identified that companies have failed to declare payments in the total amount of 5.8 million euros made upon repurchasing their own shares. As a result, tax loss amounting to 1.47 million euros was prevented. Since the repurchasing of shares may also lead to a change in tax accounting in the income tax returns of natural persons, it is important that everything is calculated correctly at company level. More information on the tax obligation and tax calculation can be found from the ETCB web page “Submission of declaration form TSD”, from chapter “Oma osa/aktsia tagasiost” (Repurchasing shares).
The ETCB advises companies to take a careful approach to monthly tax calculations. It is always worth checking whether the declared equity contributions have actually been paid to the extent declared, whether there is a right to tax exemption and whether the value of a non-monetary contribution is fair and verifiable.
You can read more about taxation of dividends and equity payments on the ETCB homepage.
