Nations have a responsibility to increase the well being and wealth of their residents. As in the private sector, one of the key factors influencing a state’s ability to pursue this goal is the number of customers (people and businesses) that it can generate or attract. Historically, states have tried to maximize their number of customers by promoting population growth, entrepreneurship and immigration.
Estonia realistically has little chance of succeeding with those approaches. But in an increasingly digital world, its experience in enhancing the lives of its citizens with digital services could translate to virtual growth, which in many ways could be better than the real thing.
After splitting from the Soviet Union and regaining its statehood in 1991, Estonia clearly saw the impossibility of physically serving a small population spread across a large territory (large in a European context; Estonia is bigger than the Netherlands or Switzerland). It is not realistic to put a bank branch in every small town or have a full-service government office in each village. Both the private and public sectors decided to bet on the development of digital solutions and e-services. Today, 25 years later, Estonia has one of the most developed national digital infrastructures in the world. It is a country where a digital signature is preferable to a physical one, taxes take only a few minutes to file, and online elections have been a fact of life for over a decade.
One of the most important foundational components of a functioning digital society is a secure digital identity. When nearly all government services are provided over the Internet, both the state and the private sector need to know who is physically accessing them via a computer or mobile device. This is why, back in 2002, Estonia started issuing its residents mandatory ID cards containing a chip that allows residents to unambiguously identify themselves and authenticate legal transactions and documents through digital signing. A digital signature has been legally equivalent to a handwritten one throughout the European Union — not just in Estonia — since 1999.
The Estonian state’s secure digital identity system and e-services facilitated location independence. The state could serve not only its sparsely populated areas, but also the entire Estonian diaspora. Estonians who reside in Silicon Valley, Singapore or South Africa can maintain a connection to their homeland via e-services, contribute to the legislative process and even participate in elections.
The ability to serve the diaspora led to a logical question: If it is possible to offer a convenient and effective e-services environment to expatriate Estonians, why not also offer it to non-Estonians, even those who do not reside in Estonia, who need better everyday solutions than those offered by their own states?
Is it possible to provide country as a service?
In recent years, the world has seen a massive leap in the number of people who offer their skills and knowledge for sale on the global marketplace irrespective of location and national borders. Businessweek estimates this number will reach 100 million in the U.S. alone by 2020.
These people are not looking to streamline their finances via tax havens. They have not been engaged in entrepreneurship so far because incorporating and maintaining a company is a major hassle. It is simpler to not take the step and to just continue drawing a salary.
At the same time, since they are providing their services globally, it does not really matter to them whether their company is a legal entity in their place of residence or a different jurisdiction altogether. The most important thing is that the creation and upkeep of the company be easy and hassle-free. Incidentally, it is also important for these people that, despite being incorporated in a different nation, they remain honest taxpayers as far as their own country is concerned.
This is one of Estonia’s target groups. Its offering is a location-independent, hassle-free and fully digital economic and financial environment for anyone who needs it. The company is managed by its owners themselves, not nominal “directors.”
Where exactly are the taxes paid, at the end of the day? “Taxes must be paid where the value was created” — that is the principle espoused by the Organization for Economic Co-operation and Development and increasingly adopted by nations. If a location-independent entrepreneur creates a company in Estonia but lives in Singapore, the company is not benefiting from Estonia’s roads, its educational system, its healthcare or any of the other services it provides its residents. The person is using the Singaporean educational system and driving on Singaporean roads, so it is logical that he or she should contribute taxes to the functioning and development of that state’s physical environment.
The solution is transparency reporting between Estonia’s tax authority and the Singaporean one. The Estonian Tax and Customs Board has the capability to offer such information and transparency. Potentially, the Estonian side could even collect the taxes and send the money to Singapore.
So why is Estonia doing it? The more people and companies that are engaged with the Estonian business environment, the more clients there are for Estonian companies. E-residents will not only establish companies, but they will also likely start using the services of other Estonian companies. They will need bank accounts, international payment service providers, accounting support, legal advice, auditors, asset management, investment opportunities, etc.
The more clients Estonian companies gain, the bigger their growth potential will be and therefore also the growth potential of the Estonian economy.
Country as a service is the new reality. For example, if the U.K. says unequivocally that it will not issue a secure, government-backed digital identity to its subjects, or if states fail to greatly simplify the machinery of bureaucracy and make it location-independent, this becomes an opportunity for countries that can offer such services across borders.
As a small state, Estonia has learned over the years to serve primarily small and micro businesses. To do so profitably, processes must be maximally digitized and automated, and not just in the private sector, but in the public one as well. Estonia’s model is location-independent, which makes it easy to scale without overextending resources. Estonia is a nation of 1.3 million people and its vision is 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.
Taavi Kotka is the government of Estonia’s CIO, the founder of the e-residency program, and one of Computerworld’s Premier 100 IT Leaders of 2016.
This story, "Country-as-a-Service: Estonia’s new model" was originally published by Computerworld.