Immovables taxed with VAT

The Baltic Times, TALLINN
By Kairi Kurm
Nov 15, 2001

As part of efforts to align Estonia with the European Union, land sales will for the first time be subject to 18 percent value added tax from next year.

Under a new VAT act real estate developers will be able to deduct the cost of their investments from their tax bill but for the first time will have to pay VAT on property they sell. The overall effect will be for property prices to rise, say analysts.

The law, which was enacted on July 13 and comes into force on Jan. 1, 2002, for the first time makes real estate sales, like sales of other goods, subject to VAT.

It is one of a number of ways in which Estonia is watering down liberal fiscal policies to make itself acceptable to the EU.

Houses and apartments constructed in order to sell, as well as land under such houses when they are sold to a first buyer and plots of land on which no structure stands will be subject to VAT.

Jurgen Ligi, member of the Parliament’s finance committee, said the act would rationalize the imposition of VAT, an area which has been clouded with uncertainty, for example on whether VAT should be levied on rent payments.

The new act was not drawn up with a view to increasing the state budget, he said. Neither Ligi nor officials from the Ministry of Finance could give an estimate of how much additional revenue the new taxation would bring the state.

Tonis Ruutel, managing director of the Association of Real Estate Companies of Estonia, was skeptical whether the new VAT law would be any more rational than the old one. “This is a big uncooked thing,” he said. “The act is very badly prepared. It is hard for lawyers to understand it.”

The changes would particularly hit Estonia’s newly emerged middle class, which had taken advantage of low loan rates to improve their living conditions, he said.

The biggest flaw in the new law is that developers who built a house prior to its introduction will have to pay VAT both on their investment in their property up to the end of 2001 and then on the money they get for selling the house.

Ulmre called for a transition period to be introduced for those who started construction work before the act came into force.

Urmas Laur, head of the real estate company Kodumajagrupp, said he was at a loss as to how to understand the new law. Imposing 18 percent VAT on land sales would be a blow for the real estate market, he added.

“These kind of changes should be published at least a year before they come into force,” he said.

Veljo Kuusk, member of the board of real estate developer Arco Vara, said that the announcement should have been made at least three to five years ago, before developers had got established. The average developers’ profit margin of 5 percent is too low for some of the tax no to be passed on to clients, he said. He echoed the complaints of others that much remains unclear about the act.

Forest management certificates kick up rumpus

The Baltic Times, TALLINN
By Kairi Kurm
Nov 15, 2001

The Estonian timber industry association Eesti Metsatoostuse Liit has lashed out at the issuing by the Estonian Fund for Nature (Eesti Looduse Fond) of forest management certificates intended to raise environmental standards among forest owners.The association said the certificates were a money raising scam and that the fund’s criticism of the timber sector was aimed at disgracing Estonia in the eyes of its neighbors in the European Union.

The outburst followed a public letter dated Oct. 31, in which the Fund for Nature said Estonia’s wood processors were using illegally cut wood and called for legislative changes to combat the problem.

Fifty percent of wood traded in Estonia is either stolen or cut without proper regard for the environment, the fund said, adding that traders in forest products are inveterate tax evaders.

“That’s a clear slander,” said Olav Anton, head of the timber industries association. “The share of illegal timber is 5 percent at most.”

Tax fraud is a problem, but one the Ministry of Environment has in hand in the form of upcoming legislative changes, Anton said. He called the Fund for Nature’s criticisms “hysterical.”

He questioned the fund’s motives in trying to increase the sales of the international Forest Stewardship Council certificate, which it introduced in Estonia three years ago and has so far awarded to such international companies as SmartWood /NEPC and SGS.

But the fund’s head, Toomas Trapido, denied the fund was pursuing private interests.

As well as a few private forests, most state-owned forests already have Forest Stewardship Council certificates.

Through certification the Forest Stewardship Council aims to support environmentally sound, socially beneficial and economically viable management of the world’s forests.economic interests. “Wood harvesting in Estonia is very badly controlled,” said Anton. “We have to show which specific companies are dealing with illegal wood at a time when Western companies will soon start demanding certificates for timber.”

The Fund for Nature receives 77 percent of its support from abroad and 23 percent from the Estonian state and private persons. Although it pioneered forest certification in Estonia, a number of other organizations are now also able to issue certificates.

A competing Pan-European Forest Certification certificate, which in countries like Germany can be ordered over the phone, does not guarantee reasonable management of forests, said Trapido. Forests certified by the Forest Stewardship Council are subject to thorough audits every five years and smaller annual audits.

The state is well on the way to having all of its 800,000 acres of forest certified and is paying an audit fee of 0.30 kroons ($0.02) per hectare, said Trapido. Olavi Paide, spokesman for the State Forest Management Center, defended the Forest Stewardship Council’s certificate. The certificate is the only international certificate available in Estonia, while the rival Pan-European Forest Certificate requires a local certification system, which has not been worked out yet, he said.

In addition to the Forest Stewardship Council’s certificates, for which it will pay 248,000 kroons, the State Forest Management Center is also applying for the International Standardization Organization’s 14001 certificate, which costs 132,000 kroons. Both represent a good opportunity for forest managers to raise the level of their professionalism, said Trapido.

Trapido suggested smaller forest owners buy a joint audit, which is cheaper. Metsaomaniku Nouandekeskus is one such company that is applying for certification it would like to share with other small forest owners.

Ando Eelma, head of Metsaomaniku Nouandekeskus, said that only one certificate of forest management had been given out in Estonia and two certificates in Latvia.

The other type of FSC certificate confirms that the whole processing cycle, from cutting the tree to the delivery of the ready product to the customer, is correct. Guntars Skudrins, head of Latvian Forest Owners Consulting, said that 25 Latvian, seven Lithuanian and one Estonian companies had already received such certificates. Skudrins said that wood exports are Latvia’s main export article and since Latvia is trading with the United Kingdom and the U.S.A. it is very important to have these certificates from the very beginning.

“In our opinion FSC sets the minimum standards that are necessary for managing forests. It is no secret that we support them,” said Trapido. According to Trapido cutting in Estonian forests is allowed without appropriate planning, thus making it impossible to check whether the expected forestry activities will result in the deterioration of the forest habitats or not. There have been several cases of recorded nesting sites of protected birds being destroyed, he said.

“The state should make or have someone else make the inventory in the forests and make a 10 year plan of how it should be used,” said Trapido.

Since the Estonian Fund for Nature could not make the state improve the legislature or the management of forests in Estonia, it turned to the European Commission in May with a request to halt the closing of the environmental chapter of the European Union accession negotiations.

In its letter to the European Commission, the EFN along with the Estonian Ornithological Society, Tartu Student Nature Protection Circle and Friends of the Earth-Estonia stated that the harvesting rate is too high in forestry and the present state institutions are insufficient for controlling forest resources.

“The EFN went to Europe to ask for business sanctions on Estonia’s wood exports, but the latter turned them down because they did not have any correct evidence,” said Anton. “We are trying to improve the situation here, while the fund is throwing mud at our face in Europe.”

Wood exports are Estonia’s second biggest export article. About 80 percent of the wood industry’s 7 billion kroon turnover comes from exports, he said.

Trapido told The Baltic Times that the letter did not mention foreign trade sanctions. He said that the situation could be worse in the future when Western companies found out the country’s shortages and stopped dealing with Estonian exporters.

EFN’s statistics show that the harvesting rate in Estonian forests has increased from 2.4 million cubic meters in 1993 to 10.8 million cubic meters in 2000. Currently, 5 percent of the forests are protected in Estonia.

The Estonian timber industries association is a non-profit organization, based upon voluntary membership of companies and organizations engaged in the acquisition of forests, chemical and mechanical processing of wood as well as marketing.