Estonia Gets Tough On Black Economy

by Mary Swire, Tax-News.com, Moscow

26 February 2002

The Estonian cabinet has adopted a new law to be implemented from 1st July which will give the Taxation Department greater powers to restrain the country's burgeoning cash economy.

An amnesty will be granted to individuals receiving cash wages in respect of past income once they enter the tax system, and the Taxation Department will be able to impose taxes on a person with a wealthy lifestyle and no apparent source of income commensurate with high outgoings.

The Government is particularly aiming at those who construct ostentatious villas but pay little or no tax. This phenomenon has been marked in many of the post-Soviet economies in Eastern Europe, where there was no tradition of paying tax on personal income and no trust in the banking system, so that most wealth has been kept 'under the bed' or transformed into bricks and mortar.

Estate agents will be responsible for providing 'impartial' valuations of properties to the tax office, which will then investigate the income of the owners or occupants. The house owner without any legal income is likely to claim that he borrowed money from a bank or a friend and did the building work with his own hands. But any borrowing will have to be documented as well: a bank will not provide a loan without a legal income and, in case of a friend, he would be implicated as well.

If the property is in the name of a wife, relatives or friends, as it often is, they will have to justify the assets they have acquired. The owners of villas who receive a minimum wage or have no legal income whatsoever will still have to pay tax on the assessed value of their properties, even if at a later date.

Bad news for the construction industry!

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