Money
Money is a topic that leaves no one indifferent. Questions and problems arise when people have to give away money by paying taxes or fees as well as regarding how and for what the state uses taxpayers’ money and in line with which principles it distributes money for aid measures.
During the reporting period, the Chancellor dealt with the issue of transparency and comprehensibility of the budget and, in this context, also addressed the role of the Riigikogu in deciding over the budget. The Chancellor was often asked whether the state treats people and undertakings equally when granting support and loans and whether support is purposeful and proportionate.
Comprehensibility of the state budget
Member of the Riigikogu, Aivar Sõerd, asked the Chancellor whether a member of the Riigikogu can have an effective and productive say at all in budgetary issues considering the current structure of the state budget.
The Chancellor found that the state’s expenditure, including investments, has been written into the 2021 State Budget Act in such general terms that it is impossible to obtain a sufficiently clear overview of what the state’s money is actually used for. The budget has become less transparent and control over use of taxpayers’ money has also become significantly more difficult.
The ambiguity and generality of the budget have been a problem for quite some time already. This is also indicated by setting up a Riigikogu support group for making the budget more comprehensible. Contrary to expectations, introducing activity- and performance-based budgeting made the state budget even more vague.
State budget expenditure is structured according to subject areas and programmes but their substance is not defined in the law. Thus, the Riigikogu lacks control over the final breakdown of expenditure in the national budget. The actual breakdown of expenditure is determined by the Government of the Republic. However, under § 115 of the Constitution, it is the Riigikogu that adopts the budget of the state’s entire revenue and expenditure.
Regrettably, budget expenditure entries are very general and even the current breakdown of expenditure on a very general level is often illusory. For example, in the 2021 budget, one of the performance areas under the area of government of the Ministry of Justice is “Rule of law” containing, in turn, the Ministry’s programme “Credible and productive legal space”. The expenditure of the performance area and of the programme (174.5 million euros) overlap, and at the same time the expenditure of the area of government of the Ministry of Justice is also 174.5 million euros. This means that in actuality there is no breakdown of expenditure. Consequently, a decision on the distribution of expenditure has been left entirely for the Government of the Republic and the Ministry to make.
The same problem can be seen in terms of breakdown of expenditure relating to areas of government of ministries.
The list of expenditure of performance areas and programmes often overlaps and the majority of expenditure is not differentiated. In essence, currently the executive decides for what purpose the money should be used. The Riigikogu does not very often pass essential decisions on the budget.
The ambiguity of the budget and the fact that the executive has been granted broad decision-making powers over the budget involves greater risk of corruption. At the same time, there is greater risk that taxpayers’ money is used unreasonably and unpurposefully. As people’s representatives, members of parliament must retain control over essential budgetary policy decisions and be accountable for budgetary policy.
The Chancellor sent a memorandum to the Riigikogu Finance Committee, the Riigikogu Budget Control Select Committee, and the Riigikogu support group for making the budget more comprehensible, recommending that the State Budget Act should lay down the requirements for additional breakdown of expenditure. The Finance Committee and the Budget Control Select Committee debated the issue at several sessions. The majority of the members of the Riigikogu taking the floor during the sessions agreed that problems exist with the comprehensibility and transparency of the state budget and that the state budget expenditure entries should be differentiated in more detail in the law. The issue is finding the right balance point between the tasks of the Riigikogu and of the Government.
According to the Chancellor’s assessment, a possibility should be found to draw up the budget in a way that enables the Riigikogu to perform the task conferred on it by the Constitution to decide on the expenditure and revenue of the state budget, and on the other hand gives sufficient flexibility for the Government of the Republic in performing its tasks.
In July 2020, the Ministry of Finance sent speedily prepared amendments to the State Budget Act for an approval round, the objective being to provide a more detailed breakdown of the state budget revenue and expenditure and create better possibilities for members of the Riigikogu in the frame of budget proceedings. According to the Chancellor’s assessment, even though a step has been taken in the right direction, the changes should be even more extensive in order for the Riigikogu to obtain the substantive right of decision-making also laid down by the Constitution.
EU recovery instrument and a levy for plastic waste
On 10 May 2021, the Riigikogu approved the financing plan for the European Union Recovery Plan, part of which is a levy for plastic waste payable to the EU budget. In this connection, the Chancellor had to form an opinion whether such a levy inadmissibly restricts Estonia’s budgetary and tax competence.
According to the EU Recovery Plan, the EU will take a loan of up to 750 billion euros in order to help member states to resolve problems caused by the Covid-19 pandemic. Never before has the European Union taken such a massive loan. The borrower is the European Union based on the EU Treaties, and the loan will be repaid from the EU budget.
The Chancellor found that, by approving the loan decision, Estonia does not surrender additional competence to the EU, even though joining the Recovery Plan loan scheme could mean that in the future the Estonian state will be making somewhat larger payments to the EU budget than before (by an estimated annual 34 million euros more than currently). In the 2003 referendum, the Estonian people by deciding in favour of accession to the European Union also authorised the use of powers laid down in the EU Treaties, including for a possible change of the system of own resources.
Analyses have found that the regulatory scheme of the recovery instrument is compatible with the EU Treaties and the use of extra-budgetary earmarked loans for lending to member states or financing projects is, in principle, allowed under the Treaties.
Every member state is responsible for loan repayments according to their share of contributions to the EU budget, and no obligations are assumed on behalf of other member states. Since the amount of possible additional future obligations is not extensive in comparison to the volume of Estonia’s state budget and the increased contributions to the EU budget are limited in time and amount, then taking on that financial obligation cannot be considered an inadmissible restriction of the budgetary competence of the next compositions of the Riigikogu. What is important is that the Riigikogu should debate and decide such issues. In this case, it was indeed so.
A levy based on the amount of non-recycled plastic waste does not result in a restriction of the Riigikogu’s financial competence because Estonia has not granted the EU competence to establish a tax, nor does this decision impose on Estonia an obligation to establish any taxes. Even if such an obligation were taken on, that decision has been approved by the Riigikogu, which is entitled to decide on taxes to be established in Estonia. However, the so-called plastic tax is not a tax within the meaning of § 113 of the Constitution payable by people and companies to the state. This is a component of the member states’ contribution to the EU budget whose calculation is based on the amount of non-recycled plastic waste.
One of the objectives of the levy is to influence EU member states to reduce plastic packaging waste. If Estonia fails to reduce the amount of plastic waste or increase the amount of recycled packaging, Estonia is estimated to incur an additional burden of 11 million euros a year, which is to be paid jointly by all Estonian taxpayers. The state may still decide what additional measures to take so as to reduce the amount of plastic packaging waste and thus also the amount of the relevant levy payable to the EU budget (see, additionally, “The loan under the European Union Recovery Plan and the levy to be calculated on non-recycled packaging waste“).
Pension reform
Under the Act on reform of the mandatory funded pension, among other things, people obtained the possibility to withdraw their money from the second pension pillar all at once. The Supreme Court assessed the law and found it to be constitutional, while conceding that, in some specific cases, implementing the law may nevertheless lead to an unconstitutional situation where risks inherent in the legislative amendment are realised in respect of someone to a larger extent than anticipated. The court referred to a possibility that, on the basis of a court decision, specific constitutional review proceedings may be initiated or recourse had to the Chancellor of Justice.
At the time of drawing up this report, the Chancellor has received relatively few petitions concerning payments from the second pension pillar. However, it may be assumed that people would also contact the Chancellor in the autumn when money from the second pension pillar will be received by working-age people who have expressed their wish to do so. Then people will find out how much money they will actually receive.
A few petitions concerning the second pillar have nevertheless been submitted to the Chancellor. For example, a question was asked about the fee for withdrawal from a pension contract. A pensioner was dissatisfied that the law does not regulate the amount of the fee or its maximum limit. According to the petitioner’s assessment, the fee (10%) for withdrawal from their pension contract was too high. If income tax payable to the state (10%) is added to this, in the case of withdrawing from the pension contract they should pay 20% of the total sum.
The Chancellor found that the Constitution does not require establishing regulatory provisions to limit the amount of the fee for withdrawal from a pension contract. An insurer may offer other more favourable contract terms in comparison to other insurers and thus also a higher pension but still insert in the contract an obligation to pay a fee in the case of premature termination of the contract. When analysing the constitutionality of the Act on reform of the mandatory funded pension, the Supreme Court noted that insurers may charge a fee for withdrawal agreed in a pension contract but that fee may not be claimed at a rate which essentially precludes withdrawal from a pension contract (para. 118.1 of the judgment).
The Chancellor was asked why people cannot enter into unit-linked pension contracts although the law allows it (see “Unit-linked pension contract“).
The possibility for unit-linked pension contracts was established by the Act amending the Funded Pensions Act and the Investment Funds Act, adopted in June 2017 and entering into force at the beginning of 2018. In that case, the assets accumulated in the pension pillar are invested and the risk is borne by the pension recipient. As a result, the pension may either increase or decrease.
Financial institutions have not yet begun to offer this kind of pension product. The reason might be uncertainty that the system of disbursements might be changed. People’s interest in withdrawal of the second-pillar money as an insurance pension is currently extremely small: the majority of those entering retirement withdraw all the money at once.
However, if someone still wishes to receive a long-term pension and, in doing so, still increase the pension on account of income received from investments, they may enter into a funded pension contract. A funded pension is not a lifetime pension but depends on the period for which payment of the pension was agreed. Income tax from funded pension disbursements is either zero or ten per cent depending on the disbursement period.
Some petitions received by the Chancellor concerned taxation of second pillar payments, in particular situations where money from the second pillar is withdrawn as a single payment. For example, petitioners desired that the tax exemption for people with no capacity for work should also extend to those with partial capacity for work (see “Taxation of mandatory funded pension disbursements in the case of partial capacity for work“) and that tax incentives applicable to those of retirement age would also extend to recipients of a special pension for police officers who have not yet reached retirement age (see “Tax incentives in the event of withdrawal of the mandatory funded pension“). The Chancellor was also asked whether taxation of payments from the second pillar constitutes double taxation of people’s savings. This is not the case (see “Taxation of payments from the second pension pillar“).
Taxes, fees and charges
Under § 113 of the Constitution, all public financial obligations must be established by a law. Regardless of practice established over the years and discussed in the courts, laws are circumvented when establishing fees and charges. It has become customary in recent times to introduce fees and charges through administrative practice. Remarkable inventiveness in establishing fees and charges is also demonstrated by local authorities who play with both the form and substance of imposing a fee or a charge.
With regard to taxes, the Chancellor was asked primarily about income tax, land tax and social tax. Most questions concerned legal clarity or application of tax exemptions or incentives in view of the principle of equal treatment.
Additional basic exemption
A mother living separately from her children asked the Chancellor why she could not use the additional basic exemption for children. Although she pays maintenance for the children, under the law the tax incentive is used by the parent who receives child allowance.
The Chancellor explained that, in the event of disagreement arising from the use of tax incentives, the state may give priority to the parent who is actually raising the children. In terms of earning income, the parent raising the children is not in the same situation as the parent fulfilling the duty of maintenance because they also have to bear the burden of everyday care and education of children. Taking care of children may become an obstacle in terms of earning a living. A parent who gives money for children’s maintenance, but does not equally participate in raising the children, has no such obstacles.
The aim of child benefits and tax incentives is to facilitate reconciliation of work and family life of parents raising children. Therefore, there is no reason to consider as arbitrary § 231(3) of the Income Tax Act, under which priority for using the basic exemption for children is given to the parent in whose family the children are growing up. However, if parents reach agreement among themselves, entitlement to additional basic exemption may also be used by the parent living separately from children.
Land tax incentives
Although the land tax is a national tax, it accrues directly to the local government budget. The Land Tax Act lays down different tax incentives and exemptions, some of which have been established by the state while others have been left for local authorities to decide.
The Riigikogu has linked the tax exemption of land under a person’s home explicitly with the condition that the person’s residence according to the population register must be at the same address (§ 11(1) Land Tax Act).
Problems have arisen in connection with the issue of the conditions on which a local authority may, in addition to tax exemption of land under a person’s home, grant additional tax exemptions to pensioners, to persons with no or partial capacity for work, to repressed persons and persons equated to repressed persons (§ 11(5) and (6) Land Tax Act). However, those possibilities for exemption from land tax are not clearly linked to the condition that the residence of an applicant for exemption as recorded in the population register should be on the same plot of land. One may ask whether a local authority may only stipulate an additional tax incentive for a plot under a person’s home – in that case, as a result of a local authority decision the person would receive a tax incentive to a larger extent than 0.15 hectares in cities or 2 hectares in the countryside. Or is it also possible to apply tax-exemption to a plot on which a pensioner, repressed person, etc, does not have their residence as recorded in the population register (e.g. land under a summer house or country home)? Currently, some local authorities actually do interpret the law so that the additional tax exemption which local authorities may lay down for pensioners, repressed persons and people with no or partial capacity for work is not linked to the condition of residence recorded in the population register.
The Chancellor found that provisions regulating establishment of an additional tax exemption can be interpreted differently, and elucidating them should be considered in the interests of legal clarity. In the Act amending the Land Valuation Act, the Land Tax Act and other Acts (406 SE), accepted for proceedings in the Riigikogu, § 11(5) and (6) of the Land Tax Act have been amended and clarified so that a local authority may grant a larger tax exemption on land under a person’s home. Once this amendment enters into force, it is unequivocally clear that a local authority can provide an additional land tax incentive to pensioners, repressed persons and others on the condition that the person’s residence as recorded in the population register is on the same plot.
Tax exemptions and incentives are an issue of political choice. The parliament could also take a position concerning a situation where an elderly person or a person with no capacity for work does not independently cope with their everyday life and must therefore go and live with their next of kin in another city, town or rural municipality. At the same time, it may become necessary for them to re-register their residence if they wish to obtain a social service from the rural municipality, town or city. After re-registration of their residence, a pensioner must pay land tax for the land under their previous residence.
If a person becomes a resident in a social welfare institution, they are still entitled to land tax exemption. Namely, § 70(2) clause 2 of the Population Register Act lays down that becoming a resident of a social welfare institution does not constitute a basis for amending a person’s residential address entered in the population register. What is entered in the population register is the place of stay of people staying in a social welfare institution (§ 96(1) Population Register Act). Local authorities could be left a flexible possibility to establish need-based land tax incentives and exemptions for pensioners and other people belonging to a risk group.
Cemetery fees
The Chancellor was contacted about public fees imposed by Tallinn in cemeteries located within the city boundaries. The Chancellor found that the fee for preparing a grave plot as well as the fee for vehicle entry to a cemetery had been established without a legal basis. Tallinn agreed with the Chancellor on both issues and neither of the fees is any longer collected (read, in more detail, in the chapter “The rule of law”).
Supervisory fees and food safety analysis
The Chancellor was asked whether the Veterinary and Food Board may charge a fee for supervisory activities even though it is an agency financed from the state budget and an undertaking has not commissioned that service from the state.
The Chancellor explained that supervisory fees have been established by law, so that such a fee may and must be charged. The system of supervisory fees is compatible with the principles laid down by EU legislation, i.e. a fee for checking compliance with requirements is collected from operators.
A question was also asked about food safety analyses. In the opinion of the petitioner, the prices for laboratory analyses by the Health Board are too high and establishment of these fees may be seen as amounting to hidden taxation of companies in the food sector.
The Chancellor found that there is no reason to consider the fees charged for laboratory analyses by the Health Board as excessive considering the price lists of other laboratories according to which a fee in the same amount or even higher is charged for analysis of similar samples. Nor does this constitute taxation. The frequency of sampling with the aim of guaranteeing food safety is determined by a food business operator in its self-check plan by assessing various risks as to how and when food may become contaminated and how often a check is needed. The operator also decides whether it is reasonable for it to analyse the samples itself (acquiring laboratory equipment, competent staff, etc., for this) or take samples for an analysis to another laboratory, and from which laboratory to commission the service.
Definition of the object of road charging
In a memorandum sent to the Riigikogu Economic Affairs Committee, the Chancellor wrote that the Traffic Act fails to lay down with sufficient clarity whether a special-purpose vehicle is taxed with the road toll or not. The Traffic Act should be amended in the interests of legal clarity. In March 2021, the Riigikogu amended the definition of truck in the Traffic Act: truck means a car designed for the carriage of goods or for towing while coupled to vehicles or for specific work applications (§ 2(93) Traffic Act).
As a result, it became clear that the road toll is also payable for special-purpose vehicles.
Social infrastructure fee
A member of Kiili Rural Municipal Council asked the Chancellor to check the constitutionality of a social infrastructure fee established by municipal council resolution No 4 of 21 February 2021.
The municipal council established a fee payable by everyone wishing to initiate a detailed spatial plan for a development involving four or more dwelling units (an apartment, a terraced house section, a residential building) in the municipality. The justification given for the decision was the need to reduce the effects on the municipality’s budget arising from new residents.
The Chancellor found that even though according to case-law a local authority may also reach agreement with a developer concerning building or financing social facilities, a rural municipality cannot unilaterally impose such financial obligations. By nature, this fee is similar to a local tax with characteristics of a levy (in return for paying the fee the payer would get a detailed spatial plan). The fee has a general fiscal objective since its imposition attempts to balance the difference between rapid population growth and slower growth of tax revenue. The rural municipality has established a uniform fee for all developers and a person who does not agree with the fee may appeal the decision to an administrative court (para. 4 of the resolution).
The Riigikogu is currently carrying out proceedings of the Draft Act amending the Planning Act (378 SE), which deals with the bases for agreeing on building planning-related civil engineering works and bearing the costs of building them, and the principles for allocation of costs. The amendment does not concern financing of social facilities. However, in the interests of legal clarity, it is important that the Riigikogu should also express an opinion on social infrastructure costs: whether agreements on bearing costs are allowed or prohibited (while no relevant regulation exists). If the Riigikogu finds that a social infrastructure fee might be charged from a developer or agreements with a developer could be concluded for financing social facilities, then these possibilities should be created by law.
The Chancellor recommended the same in the 2017–2018 annual report.
The requirement for an employer’s deposit in the Aliens Act
The Chancellor had to resolve an undertaking’s concern involving a complaint that, after the entry into force of an amendment to the Aliens Act on 1 July 2020, the Police and Border Guard Board (PBGB) had changed its administrative practice in connection with temporary agency workers, so that it is now less favourable towards undertakings. While previously an employer had to have funds on deposit to the extent of ten per cent of the employer’s monthly remuneration fund then after amendment an undertaking had to deposit ten per cent of the 12-month remuneration of a particular alien.
The Police and Border Guard Board may register temporary agency work as short-term employment or grant an alien a residence permit to work as a temporary agency worker if the employer has deposited the amount required under the Aliens Act to guarantee the obligations related to remuneration.
The issue is for what period the employer’s deposit is to be calculated.
By the time of submission of the petition, the PBGB had applied the provisions of the Aliens Act regulating the deposit (§ 106(8) and § 176¹(2)) in three different ways. First, the PBGB found that the sum to be deposited is linked to the anticipated period of the worker’s employment. Second, the PBGB found that the remuneration fund is linked to one month’s remuneration. The third interpretation, i.e. the one used at the time of submission of the petition, was that calculation of the remuneration fund must be based on the anticipated period of employment or at most 12 months’ remuneration. The PBGB informed undertakings about the change of its administrative practice by e-mail.
Impelled by the petition, the Chancellor analysed the conformity of the regulatory provisions on the employer’s deposit in the Aliens Act with the requirement of a clear definition and the proportionality of a deposit as financial security, and assessed the PBGB administrative practice in connection with applying the regulatory provisions.
In the memorandum to the Riigikogu Constitutional Committee, the Ministry of the Interior and the Police and Border Guard Board, the Chancellor reached the opinion that the rules establishing the obligation of employer’s deposit (§ 106(8) and § 176¹(2) Aliens Act) do not lay down with sufficient clarity what sum an employer must deposit. Nor is there a maximum limit for the financial obligation. In view of the onerous nature of the financial obligation and the requirement of a legal basis, this shortcoming cannot be overcome even by way of a constitutionally-conforming interpretation. Section 106(8) and § 176¹(2) of the Aliens Act do not confer on the PBGB a general right of discretion to decide on the length of period based on which the deposit is to be calculated. No such right can be deduced from the wording of the provisions in question nor is it compatible with §§ 3, 10 and 113 of the Constitution.
In the memorandum, the Chancellor also raised the issue of the proportionality of the regulatory provisions since, according to information from employers’ representative organisations, no necessity has arisen in practice to actually make use of the employer’s deposit. Nor is there any other data (including impact assessments) that would enable a conclusion that the deposit is unavoidably necessary for achieving a particular aim.
On this basis, the Chancellor asked the Ministry of the Interior and the Riigikogu first to analyse the necessity for regulatory provisions on the employer’s deposit as laid down by the Aliens Act. Should it be confirmed that the deposit requirement is necessary, the Chancellor asked the Riigikogu to amend the Aliens Act so that an employer would be able to understand the amount of the financial obligation from the wording of the law without any external assistance. The conditions for disbursement and repayment of the deposit as well as the main procedural norms in connection with it must also be regulated.
The Chancellor reached the opinion that it cannot be considered lawful that the PBGB has changed the period for calculating the deposit by relying on a legislative amendment which is not at all related to the period of calculating the deposit. Such a change in practice is deceitful towards employers and the Chancellor asked that it should be avoided in the future.
Considering that the PBGB as an executive agency cannot set aside a norm not conforming to the requirement of a clear definition and it has the duty of applying applicable law, the Chancellor suggested as a solution for calculating the deposit that the remuneration fund could be based on one month’s remuneration and ten per cent of this should be deposited. Until the law is amended, this enables application of the regulatory provisions so that interference with the rights of persons is minimal.
Crisis support for undertakings
The Chancellor assessed the compatibility of numerous crisis assistance measures with the principles of equal treatment. The gist of several petitions concerned ascertaining the need for assistance: if everyone is in a difficult situation due to restrictions then whom should the state support and whom not?
On several occasions, the Chancellor reached the conclusion that the conditions for support measures were reasonable and not arbitrary. At the same time, the reasoning for the conditions for support measures is often too scant and the actual reasons can only be found out by making enquiries with the drafters of conditions. Therefore, it is difficult for people to understand the considerations based on which the conditions for support and the fields of activity eligible for support have been determined. Considering that the aim is to make available state money with a view to helping undertakings survive the crisis, this is a worrying trend in the process of allocating state money. This kind of behaviour renders the decision-making process for allocating support non-transparent and incomprehensible. If the bases for allocating support cannot be understood, it is difficult for undertakings to protect their rights because specific deadlines have been set for allocating support.
In the so-called performing arts institutions case, the Chancellor submitted an opinion in Supreme Court constitutional review case No 5-20-6. In this case, the Supreme Court had to resolve the issue whether it was compatible with the principle of equal treatment that § 4(2) clause 6 of the Minister of Culture Regulation of 12 September 2020 on “Exceptional aid to the sphere of culture and sport due to the outbreak of COVID-19“ precluded crisis aid to a performing arts institution that had not voluntarily submitted statistics on its repertoire by 1 May 2020 at the latest while giving entitlement to apply for crisis aid to a performing arts institution that had voluntarily submitted statistics on their repertoire by that time.
The Chancellor found that the relevant regulation partially contravened § 12(1) of the Constitution and the principle of legal certainty. The Supreme Court too decided that the ministerial regulation partially contravened the Constitution and invalidated it to the relevant extent.
Arbitrariness of conditions for support
On several occasions, the Chancellor had misgivings whether crisis support measures were sufficiently well-considered and compatible with the principle of equal treatment. The prohibition on treating unequally those who are equal has been violated if two persons, groups of persons or situations are arbitrarily treated unequally. Unequal treatment may be considered arbitrary if no reasonable justification for this exists. On that basis, the Chancellor assessed the measures established by the Minister of Foreign Trade and Information Technology Regulation No 2 of 20 January 2021 on “Support to undertakings in tourism-related sectors of the economy in connection with the spread of the coronavirus causing the COVID-19 disease“ (Regulation No 2).
In her memorandum, the Chancellor found that it was arbitrary to deny support to an accommodation establishment which had not declared any services taxable by nine per cent VAT nor was liable to account for VAT. This was done in a situation where declaring services taxable by nine per cent VAT is voluntary. The Chancellor explained that the conditions established under the regulation for accommodation establishments which do not have any other possibility to prove their economic indicators alongside declaring turnover taxable by nine per cent VAT does not ensure a constitutionally compliant result in every situation.
The Chancellor also checked the constitutionality of the condition of classification of an undertaking’s main activity declared for payment of wage support under § 191(1) of the Government of the Republic Regulation No 87 of 19 November 2020 on “Employment programme 2021–2023“ (Regulation No 87). According to that condition, the classification of an undertaking’s main activity had to be based on the “Estonian Classification of Economic Activities (EMTAK)”. In a memorandum sent to the Ministry of Social Affairs, the Chancellor explained that allocation of support rigidly only on the basis of fields of activity as classified in the EMTAK raises the question of the constitutionality of the conditions for support if persons operating in the same field are treated unequally because their EMTAK code does not conform to the requirements of the Regulation.
The Chancellor reiterated this opinion in a memorandum sent to the Ministry of Economic Affairs and Communications and the KredEx Foundation. The memorandum was motivated by a petition asking the Chancellor to check a condition in the financing contract between the Ministry and KredEx which referred to the EMTAK code of the main activity as a precondition for obtaining support.
In addition, the Chancellor drew attention to the fact that it could not be considered appropriate on the part of KredEx to issue guidance to re-submit an undertaking’s annual report so as to be able to simply change the undertaking’s main field of activity which must formally comply with the requirement for applying for support. The fact that an undertaking’s main field of activity does not formally match the EMTAK code at the time of applying for support cannot necessarily lead to the conclusion that the undertaking has provided false data in its annual report. An undertaking’s profile of activity may be broad and it may also change over time. The Chancellor noted that, in view of the diverse activity profiles of undertakings nowadays, creating more flexible possibilities for recording and amending the main field of activity in EMTAK should be considered. This would help to tidy up the registry data and present them more comprehensibly, so as subsequently to be able to organise proceedings more effectively and at less cost by relying on those data.
The Chancellor also reached the opinion that the conditions established by Regulation No 2 for supporting accommodation establishments were not arbitrary nor did they violate the principle of equal treatment.
On several occasions, the Chancellor was contacted with a concern that Regulation No 2 stipulated the possibility of support only for catering establishments located in Tallinn old town but not for establishments outside the boundaries of the old town. The Chancellor reached the opinion that there was no reason to consider the criteria established by Regulation No 2 for supporting catering establishments in Tallinn old town as arbitrary. The instant case does not involve a situation where the one and only objective of paying support would be to compensate crisis damage to catering establishments. Although support to a catering establishment in Tallinn old town is accounted on the basis of an establishment’s decreased turnover, the broader aim of the support is to maintain the sustainability of Tallinn old town as the most visited tourist attraction in Estonia. In view of this, the support measure is very specifically limited to Tallinn old town as a heritage conservation area. This kind of objective is admissible and is not arbitrary.
The Chancellor was asked whether redistribution of support money intended for travel undertakings under Regulation No 2 − if funds are not sufficient to satisfy all the relevant applications − places some undertakings in an unequal situation in comparison to others.
The issue was that, during the redistribution, support money was distributed between eligible applications proportionally to the ratio of the budget for financing the relevant support and the total sum of the relevant eligible applications. Since the number of eligible applications was bigger than the amount of money available for support, according to the Regulation all grants were reduced by 52.27%. Thus, undertakings which had applied for support within the maximum limit received a smaller percentage of support in comparison to the total sum of labour taxes paid by them than undertakings which paid taxes below the maximum limit.
The Chancellor explained that such a situation was not due to the principle of redistribution but because the state imposed a maximum limit on the amount of support (i.e. 80 000 euros). Setting a maximum limit cannot be considered unreasonable since the state has limited resources for allocating support. Nor is there reason to consider the principle of proportional redistribution as arbitrary since it is logically linked to the sum in the undertaking’s application and ensures that allocation of support is as broad-based as possible. In essence, setting the maximum limit for support and proportional reduction of support corresponds to the decision that first and foremost support should be given to smaller undertakings in proportion to the loss incurred and somewhat less to larger undertakings. However, only the minister is competent to impose such preferences.
The Chancellor was contacted by a sole proprietor who was not eligible for wage compensation under the Government of the Republic Regulation No 87 of 19 November 2020 on “Employment programme 2021–2023“ (Regulation No 87 v.r) since a decrease of their business income in a comparison of reference years did not meet the eligibility conditions for wage support. The Chancellor explained that the conditions imposed by this Regulation for eligibility of sole proprietors for support cannot be considered arbitrary since they ensure that support is paid as swiftly as possible and according to its intended purpose.
The Chancellor was also asked about the conditions for support paid to operators of international regular bus services. The Chancellor reached the opinion that the conditions for support established by the Minister of Foreign Trade and Information Technology Regulation No 68 of 5 November 2020 on “Additional support for partial compensation of losses arising from the outbreak of the coronavirus causing the COVID-19 disease to undertakings in directly tourism-related sectors of the economy“ do not violate the principle of equal treatment. Since the objective of the support measures is to support undertakings which continued international regular bus services, the latter are not in the same situation as undertakings which discontinued regular international services. Therefore, equal treatment of both groups cannot be required.
The Chancellor was asked to check the constitutionality of §§ 12 and 19 of the Creative Persons and Artistic Associations Act since no additional money was allocated to artistic associations for organisational expenses in connection with paying additional support. The Chancellor found that the norms in the Creative Persons and Artistic Associations Act concerning support paid to artistic associations are constitutional. The state has several possibilities for compensating increased organisational expenses related to payment of additional support during a crisis situation. It can be considered reasonable that tasks are redistributed and money is used economically. Allocation of additional money to compensate procedural expenses can be presumed if it is found that the existing money is not sufficient. Even in this situation the law does not necessarily have to be amended but one-off additional allocations can be made.
Regarding issues of support, the Chancellor was also contacted by undertakings from the pig farming and horticultural sectors. The conditions for exceptional support intended for pig farming undertakings were laid down in the draft legislation so that a large amount of support funds would have been distributed between only a small number of undertakings engaged in pig farming. The draft did not clarify the choice of conditions nor did it contain reasoning for different treatment of persons. The condition imposed for paying support in the horticultural sector was that an undertaking must have applied for a single area payment and their application must have been satisfied by the Agricultural Registers and Information Board in 2020. When imposing the conditions, it had not been taken into account that applying for area payments has been voluntary and that the corona pandemic has similarly caused damage to those undertakings in the sector that did not apply for single area payment. The Chancellor asked that the Minister of Rural Affairs in his regulation should establish conditions for support that would allow equal treatment of undertakings when allocating support from public funds. The Ministry of Rural Affairs amended the conditions for support before adopting the Regulation.
Setting the specific underlying criteria for support is always a matter of assessment. Taking into account the specificity of individual cases in doing so is extremely complicated. In this regard, the conditions for measures may vary depending on whether the aim is only to compensate crisis damage to undertakings or to support the particularity of a specific geographical area or sector. When establishing crisis measures, a balance should be found between available resources and the wishes of undertakings suffering as a result of the crisis. The minister must identify that point of balance and set the preferences.
Public accessibility and comprehensibility of reasoning
Although on several occasions the conditions for support can ultimately be considered justified, reaching that conclusion often takes much time and is not easy without external assistance.
Therefore, the Chancellor has drawn attention in her memorandum to the fact that, in the interests of effective and timely legal protection, the purpose and conditions of a support measure should be explained exhaustively and clearly in the explanatory memorandum (see § 63 of the rules on good law-making and legislative drafting). Normally, there is little time to apply for support granted on the basis of regulations. For instance, the application round for compensation of losses in the tourism sector was open from 29 March to 8 April 2021. In view of the acute need for assistance, such haste is understandable. However, the principle always to be observed is that the target group of a support measure is defined as precisely as possible. In that case, if necessary, the applicants can also appeal refusals and, if the appeal is successful, they can still obtain support.
However, if a person only knows the criteria for eligibility for support but it is not unequivocally clear based on what the criteria were determined in the specific case, the person lacks sufficient information to decide whether they were excluded from the target group of the measure lawfully or unlawfully. This, however, significantly diminishes the possibility to protect one’s rights. Interference with a person’s rights can essentially be ascertained only if an undertaking applies for support just in case and, in the event of refusal, appeals the negative decision in court, simultaneously seeking constitutional review. Although the Chancellor has the opportunity to check the constitutionality of a regulation based on a petition, this might not ensure timely help to the person concerned since the result of the analysis would probably be complete only when it is no longer possible to apply for the specific support.
It is impermissible if the reasoning for establishing a support measure can only be accessed in appeal proceedings or with the help of the Chancellor of Justice. Therefore, the Chancellor has also emphasised that providing reasoning for support measures retrospectively is problematic.
Money laundering prevention and customs supervision
The area of virtual currencies is rapidly developing and new risks are emerging along with this, including the risk of money laundering or fraud.
According to Estonia’s 2020 national risk assessment of money laundering and terrorist financing, the biggest risks of money laundering relate to virtual currencies. First and foremost, these concern risks related to operating licences of virtual currency service providers, but not only. Risks related to virtual currencies may be connected both with money laundering and terrorist financing as well as investment fraud.
In 2017, Estonia was one of the first European countries establishing the obligation of authorisation for provision of virtual currency services. This transposed Directive 2015/849, not yet entered into force at that time, establishing the first legal framework on an EU level for virtual currency services.
Issuing of authorisations for virtual currency services became very popular in Estonia because operators sought international recognition as to the legality of their economic activities. At the same time, the law also enabled applying for authorisation even when no services were actually provided in Estonia. Allowing this meant that carrying out supervision on Estonian territory became essentially impossible because often neither the technical platform for providing the service nor the staff implementing money laundering prevention requirements were located in Estonia.
Since applying for authorisation was very easy, many parties abusing this opportunity emerged whom the state was no longer able to control. Subsequently, supervision was to a large extent dependent on the willingness of the service provider to subject themselves to supervision. This significantly increased the risk that, with the help of Estonian companies, illegal transactions would take place, along with the accompanying risk of international reputational damage.
Considering that the number of applications for authorisation exceeded expectations as well as increased risks due to insufficient legislation, in 2019 the Riigikogu adopted amendments to the Money Laundering and Terrorist Financing Prevention Act concerning virtual currencies, making the rules for provision of the service stricter. In order to issue authorisation, an undertaking’s registered seat, the seat of the management board (head office) and place of business must be in Estonia.
The Chancellor was contacted by several companies complaining about changes in the object of control for authorisation in the field of virtual currencies, as well as foreign citizens concerned about possible fraud. Since the field of virtual currencies is still little regulated and the supervisory resources in comparison to the service providers operating in the sector are insufficient, in the course of supervision the authorities have started interpreting the provisions of the Money Laundering and Terrorist Financing Prevention Act narrowly, thus restricting the activities of undertakings.
The Money Laundering and Terrorist Financing Prevention Act does not state that all the management board members must be in Estonia or be resident for tax purposes in Estonia but, for example, this has become a requirement in carrying out supervision; consequently the authorisations of several virtual currency service providers have been declared invalid. Based on court decisions, the Chancellor has had to explain that it cannot actually be required that all the members of the management board should be located in Estonia but that what is important is the physical location of persons in the company management board who in actuality perform the management and control functions of economic activities. In other words, this is the place where a company’s management board makes everyday management decisions.
Closing of bank accounts
On 20 July 2020, amendments to § 89 (new subsections 91 and 92) of the Credit Institutions Act entered into force, obliging banks to provide more thorough justifications as to why they decide to close an existing account or refuse to open a new account. The purpose of these amendments was to motivate banks as providers of services vital for a person’s life or business to thoroughly consider whether and why it is not reasonable to open an account for someone or whether there is indeed a reason to terminate a client relationship.
However, the Chancellor continues to receive complaints about a bank deciding to close a person’s account without having provided the necessary justification. Although the number of complaints has decreased recently, there are still people who cannot pay for the necessary services or make other payments essential in everyday life. Economic activities of some companies have essentially stopped after closure of their account, or they even have to close down completely.
The desire of banks to mitigate possible risks is understandable. The fight against money laundering must be systematic. However, it is not lawful to use this as a disguise to deprive someone of access to basic payment services and legal protection.
In a memorandum to the Minister of Finance, the Chancellor noted that the requirements to combat money laundering may not be used as a pretext to reject financially less attractive persons (including, for instance, tax debtors or people owing money in enforcement proceedings). Although under the Credit Institutions Act banks themselves are allowed to choose to whom they wish to provide services, the banks’ choice in serving natural persons is limited by the Law of Obligations Act. Under the Law of Obligations Act, a bank undertakes to enter into a basic payment service contract with a consumer lawfully residing in the European Union in the event of justified interest from a consumer. Thus, a bank must enter into a payment service contract and open an account for a person in respect of whom no suspicion of money laundering and terrorist financing exists and if the person and the contract terms sought by them conform to the statutory requirements, the payment service provider’s general terms and conditions for services or the standard conditions for provision of payment services.
Organisation of customs supervision
Lawful organisation of customs supervision and the postal service is important since this also ensures protection of the confidentiality of messages. Opening a postal item must be transparent and purposeful. As a rule, a postal worker may open and close a postal item in the presence of a customs official for the purpose of carrying out customs checks.
In the course of customs supervision, examining the contents of a postal item more thoroughly than required by the reason for opening the item is prohibited. The persons present at the opening of a postal item are required to maintain postal secrecy concerning information which becomes known to them when the postal item is opened (§ 32(5) Postal Act). Customs are also required to draw up a report on the results of examination of a postal item containing goods.
Since the Chancellor received several complaints about opening postal items, the Chancellor’s advisers carried out an inspection visit to the logistics centre of the company Eesti Post. The inspection revealed that opening and marking postal items did not always comply with the requirements laid down by §§ 61 and 66 of the Customs Act and § 32 of the Postal Act, reports on opening or examination were not always drawn up and not always was an employee of the company Eesti Post present during the opening of a postal item. This violates the law and the principle of good administration.
Fundamental rights and freedoms of persons must be complied with when opening postal items. If procedural rules are not observed when opening an item and the recipient of a postal item is not notified of opening, this violates the right to good administration (§ 14 Constitution) and the risk of violation of confidentiality of messages (§ 43 Constitution) occurs.
Under the Constitution (§ 14), the Tax and Customs Board as a body exercising governmental authority is obliged to guarantee protection of a person’s fundamental rights and freedoms in its activities.
When carrying out customs supervision, the Tax and Customs Board must ensure that the principle of good administration enshrined in § 14 of the Constitution is complied with in a fair and proper procedure.
Activities carried out in respect of a postal item must be fit for purpose and transparent. The recipient of a postal item must subsequently be notified that the item was opened, and opening must always be fit for purpose and justified. As a rule, opening postal items secretly and leaving the person not notified about this is prohibited. Within the limits of their competence and only with court authorisation may surveillance and security agencies, including the Tax and Customs Board, open and covertly examine postal items in the frame of criminal proceedings.