Finnish government has announced it could change the country's tax code and abolish the corporate tax, following the positive examples from the neighbouring Estonia. Estonia excluded corporate income tax on retained earnings a while ago, with positive effects on the economic growth.
Finnish Economic Affairs Minister, Jyri Häkämies, said that he would introduce the proposal to replicate the Estonian model to the cabinet for discussion. Member of the senior coalition partner in the governing coalition, the centre-right Kokoomus party of the Prime Minister Jyrki Katainen, assessed that the change to the tax code would encourage companies to invest their profits rather than to withdraw them.
Dividends would continue to be taxed, at the rate of 24.5%, but the reinvested profits would be exempted from taxation. “I prefer the idea of encouraging investment instead of profit distraction,” Häkämies said and added that zero corporate tax on reinvested profits “could be the future”.
The Estonian model has caused a wide disagreement since the first change of the tax code in this direction in 2000. Some theoreticians argued it makes economic restructuring more difficult and reduces the fiscal incomes, with corporate profits being repatriated in different ways without paying the corporate income tax.
On the other hand, it undoubtedly eases tax returns and promotes re-investment, with thus far proven track record of increasing economic growth.