Estonia Is Demonstrating How Government Should Work in a Digital World

The country is pioneering an economic strategy for small countries that is smarter and nobler than serving as a tax haven.

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Jun 10 2016, 2:00pm

Taavi Kotka is the Chief Information Officer of Estonia.

In May, Manu Sporny became the 10,000th "e-Resident" of Estonia.

Sporny, the founder and CEO of a digital payments and identity company located in the United States, has never set foot in Estonia. However, he heard about the country's e-Residency program and decided it would be an obvious choice for his company's European headquarters.

People like Sporny are why Estonia launched a digital residency program in December 2014. The program allows anyone in the world to apply for a digital identity, which will let them: establish and run a location independent business online, get easier access to EU markets, open a bank account and conduct e-banking, use international payment service providers, declare taxes, and sign all relevant documents and contracts remotely.

I've started calling this "Country as a Service."

Kotka. Image: Slush

As in the private sector, the public sector has the responsibility of retaining citizens and adding new residents, businesses, and income generators to the roster to improve the economic condition. Global competition among states is growing, however, and doing the same-old, same-old won't equal results.

Additionally, large countries have begun to dismantle the models that brought success to tax havens; a business cannot, and should not, be able to sustain itself on fraud. Small nations, especially, must find new ways in which to prosper.

Estonia has a grand total of 1.3 million inhabitants living in not-the-most-desirable climate, located at the same latitude as Alaska. Anyone who is able to tolerate the climate would much prefer to have the social protections of the surrounding Scandinavian states. As a result, Estonia's population numbers are declining. On the surface, it would seem that Estonia has no chance of growth in this situation, but if you take a closer look; it does.

Estonia has a small population across a sprawling terrain. It's not an efficient model to build a bank branch or have a full-service government office stationed in every small village. After regaining statehood from the Soviet Union in 1991, the private and public sectors saw the need for a new method of government. Together, they took a leap of faith and decided to transform Estonia into a nation based on digital solutions and e-services.

Estonia, 25 years later, has one of the most developed national digital infrastructures in the world. Digital signatures make signing documents an effortless task. Filing your taxes only takes a few minutes online every year. Online voting makes it easy and time-efficient for every citizen to participate in elections.

Estonia has one of the most developed national digital infrastructures in the world

One of the most essential components of a functioning digital society is a secure digital identity. The state and the private sector need to know who is accessing these online services. Likewise, users need to feel secure that their identity is protected.

Estonia found the solution to this problem. In 2002, we started issuing residents a mandatory ID-card with a chip that empowers them to categorically identify themselves and verify legal transactions and documents through a digital signature. A digital signature has been legally equivalent to a handwritten one throughout the European Union—not just in Estonia—since 1999.

With this new digital identity system, the state could serve not only areas with a low population, but also the entire Estonian diaspora. Estonians anywhere in the world could maintain a connection to their homeland via e-services, contribute to the legislative process, and even participate in elections. Once the government realized that it could scale this service worldwide, it seemed logical to offer its e-services to those without physical residency in Estonia. This meant the Estonian country suddenly had value as a service in addition to a place to live.

What does "Country as a Service" mean?

With the rise of a global internet, we've seen more skilled workers and businesspeople offering their services across nations, regardless of their physical location. A survey by Intuit estimates that this number will reach 40 percent in the US alone by 2020.

These entrepreneurs and skilled artisans are ultimately looking for the simplest way to create and maintain a legal, global identity as an outlet for their global offerings.

They look to other countries, not because they are looking for a tax haven, but because they have been prevented from incorporating and maintaining a business, due to barriers from their own government.

The most important thing for these entrepreneurs is that the creation and upkeep of the company is easy and hassle-free. It is also important that, despite being incorporated in a different nation, they remain honest taxpayers within their country of physical residence.

This is exactly what Estonia offers—a location-independent, hassle-free and fully-digital economic and financial environment where entrepreneurs can run their own company globally.

Where do e-Residents pay taxes?

The OECD's (Organization for Economic Co-operation and Development) principle belief, increasingly adopted by nations, is that "taxes must be paid where the value was created." With this in mind, a location-independent entrepreneur who creates a company in Estonia, but lives in the US, France or Singapore, should pay their taxes to that state.

So how does Estonia benefit?

The more people and companies that are engaged with the Estonian business environment, the more clients there are for Estonian companies.

When an e-Resident establishes a company, it means that the company will likely start using the services offered by other Estonian companies (like creating a bank account, partnering with a payment service provider, seeking assistance from accountants, auditors and lawyers). As more clients are created for Estonian companies, their growth potential increases, along with the growth potential of the Estonian economy.

Eventually, there will be more residents outside borders than inside them

If states fail to redesign and simplify the machinery of bureaucracy and make it location-independent, there will be an opportunity for countries that can offer such services across borders.

Estonia has learned that it's incredibly important in a small state to serve primarily small and micro businesses. In order to sustain a nation on this, we must automate and digitize processes to scale. Estonia's model, for instance, is location-independent, making it simple to scale successfully. We hope to acquire at least 10 million digital residents (e-Residents) in a way that is mutually beneficial by the nation-states where these people are tax residents.