Estonia Tax System: A model for Ghana?

In a recent press briefing, Ghana’s Vice President, H.E. Dr. Mahamudu Bawumia, outlined a bold vision for reforming the nation’s tax system, drawing inspiration from Estonia’s acclaimed tax model to bring greater certainty to Ghana’s tax regime. This announcement has sparked my interest in evaluating the potential benefits and challenges of adopting such a model. This analysis explores the key features of the Estonian tax system, compares them with Ghana’s current framework, and assesses the implications of this proposed shift.

The Estonian Tax Model: A Simplified Approach with Strong Incentives

Estonia is renowned for its straightforward and business-friendly tax regime. The centerpiece of its system is the corporate tax structure, where companies only pay taxes on distributed profits, while reinvested earnings are tax-exempt. This approach encourages businesses to reinvest in growth and development, contributing to Estonia’s robust economic expansion.

In addition to its corporate tax policy, Estonia’s personal income tax is flat at 20%, and the country boasts a high degree of digitalisation in tax administration. These factors combine to create a system that is not only easy to navigate but also supportive of entrepreneurial activities and foreign investment.

Ghana’s Tax System: Complexity and Compliance Challenges

Ghana’s current tax system, while comprehensive, is often criticised for its complexity and the burden it places on businesses. Corporate taxes are levied at a rate of 25%, and there are various other taxes, including Value-Added Tax (VAT), National Health Insurance Levy (NHIL), COVID Levy and a range of sector-specific taxes. For businesses, particularly small and medium-sized enterprises (SMEs), navigating this maze of taxes can be daunting, leading to compliance challenges and a relatively high cost of doing business.

Furthermore, tax collection in Ghana is heavily reliant on manual processes, which not only increases the administrative burden but also leaves room for inefficiencies and potential tax evasion. The idea of emulating Estonia’s simplified and digitalised tax regime is, therefore, appealing to those seeking to modernise Ghana’s economy and improve the business environment.

Potential Benefits: Simplification and Economic Growth

Adopting aspects of the Estonian tax system could offer significant benefits for Ghana. Simplifying the tax code and reducing the number of taxes could lower the compliance burden on businesses, particularly SMEs, and encourage more entrepreneurs to enter the formal economy. By adopting a model where taxes are only paid on distributed profits, Ghana could stimulate reinvestment in the economy, leading to job creation and sustainable growth.

Moreover, the digitalization of tax administration, as seen in Estonia, could greatly enhance efficiency, reduce opportunities for corruption, and increase tax compliance. This, in turn, could lead to higher revenue collection without the need to increase tax rates.

Challenges and Considerations: Implementation and Local Context

However, the transition to an Estonian-style tax system is not without its challenges. Ghana’s economy, while growing, is more diversified and complex than Estonia’s, with significant contributions from agriculture, mining, and oil. Each of these sectors has its own tax regime, which would need careful consideration in any reform.

Additionally, while Estonia’s flat tax system is lauded for its simplicity, Ghana must consider the social implications of such a model. Estonia’s relatively small and homogenous population differs greatly from Ghana’s diverse and larger population, which includes significant disparities in income and wealth. A flat tax rate might not be the best fit for Ghana, where progressive taxation is seen as a tool for addressing inequality.

Furthermore, the transition itself would require substantial investment in digital infrastructure and capacity building within the Ghana Revenue Authority (GRA). Ensuring that businesses and individuals can adapt to a new system will also be crucial to its success.

Conclusion: A Bold Vision with Careful Execution

As the Vice President preach of “Bold Solutions”, the idea of modelling Ghana’s tax system after Estonia’s is ambitious and holds considerable promise. Simplification of the tax code, encouragement of reinvestment, and digitalisation of tax administration could provide a much-needed boost to Ghana’s economy, making it more competitive on the global stage.

However, this transition must be carefully managed. Policymakers need to ensure that the new system is tailored to Ghana’s unique economic and social context, and that adequate support is provided to businesses and individuals during the transition. With thoughtful implementation, Ghana could indeed create a tax system that drives growth, fosters innovation, and supports long-term development, much like the Estonian model it seeks to emulate.

About Writer

Kofi Ayisi Aboagye is a seasoned accountant and internal auditor with over 12 years of experience in finance, corporate improvement advisory, and risk management, particularly within development finance and small businesses. As a business coach, facilitator, and advisor, he provides strategic guidance to emerging businesses. Kofi is a chartered accountant with ICA England & Wales and ICA Ghana and holds an MBA from Warwick Business School. He is the Managing Partner of NKAKA & Partners.