At the request of the Estonian E-Commerce Association, we analysed how to tackle the enormous tax loss arising from non-compliance of foreign e-shops in Estonia.

Insufficient legislation

Our analysis revealed that each year, Estonia is missing out on an average of EUR 145 million in VAT from foreign online shops. This is caused by insufficient legislation that, among other things, does not enable the Tax and Customs Board (MTA) to carry out an effective audit and enforcement procedure towards foreign e-shops.

“Even if someone has the information, for example, when commercial banks report data to the Bank of Estonia – even if the data exists in a personified form, neither the central bank nor payment services providers can surrender it to the MTA because of tax secrecy. In other words, there are no legal levers with which to make sure the tax board gets the data it needs for collecting unpaid taxes,” commented our partner Allar Jõks.

Furthermore, based on the current legislation, online shops registered in Estonia must pay VAT on purchases done by customers abroad, and VAT is due in the country where the purchase is done once a certain cross-border turnover exceeds EUR 10 000. As such, the foreign e-shops need to pay VAT to the Estonian government on the sales done to Estonia, should that threshold be exceeded. However, many foreign online shops fail to do so, which gives them a competitive edge, being able to offer lower prices on the account of lower VAT rates.

Possible solutions

Our specialists see an amendment to the Estonian Bank Act as the fastest solution to the problem. The change should be made so that the Bank of Estonia is allowed to share certain specific data about e-traders with the Tax and Customs Board.

Should there be barriers to the domestic exchange of tax information to the Estonian Bank and such a one-point-data-collection approach is not doable, Estonia should go in line with the EU regulations and foresee similar obligations for Estonian payment institutions. The latter provides that e-commerce data should be freely available to concerned parties from January 1, 2024. As the tax loss is significant, there is no reason to wait until that time.

Our services and client team

Our analysis was based on publicly available data. As a part of the analysis, our team asked the Bank of Estonia for the ballpark figure for the turnover of foreign e-shops in Estonia and the Tax and Customs Board for declared turnover. Based on this and relying on certain assumptions, we calculated potential VAT loss.

The analysis was carried out by our tax specialists partners Kaido Künnapas and Allar Jõks.

Read more: ERR.