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De Facto on tax reform: bigger burden for businesses and more freedom for owners

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe tax reform provides for the transferring the tax burden to businesses and relieving owners of those businesses of payments. Under certain conditions, businesses will have to pay less taxes than before, says De Facto programme of LTV.

The programme emphasizes that after continued pressure from businessmen, politicians agreed to copy Estonia’s tax regime for businesses. Since 2000, Estonia has been collecting taxes from businesses when money is paid to owners, not when businesses earn profits. This means remaining finances of companies are not taxed.

«This is a very beneficial way for companies to gain finances,» says Prof. Karstens Staers of Tallinn University of Technology. He explains that this way the state shares risks with businessmen because payment of taxes is put off. When a bank issues a loan, it cares nothing for the way the money is used. «In this case, however, the state basically lends money to businesses without any conditions. This is why it is not surprising that businesses like this tax system very much,» adds the economist.

De Facto calculate that a company that earns EUR 100,000 and plans to pay its owners EUR 50,000 in dividends, that company would pay EUR 20,000 in taxes. The owner would get EUR 45,000.

Under the same conditions after the reform, the amount of taxes to be paid would be EUR 12,500. The owner would still get the same EUR 50,000.

Under the new model, businesses will have to pay corporate income tax at 20%. Currently, aside from 15% profit tax, businesses have to pay PIT of 10%. This will change after the reform.

In reality, calculation of profit tax is not simple. Latvia is set to introduce discounts for investments. In certain cases, the current model is more beneficial, the programme says.

«An effective corporate income tax in Latvia is 6-7%, because there are many different discounts in place. In summary, discounts for each business are applied differently. Many don’t pay corporate income tax and divide dividends. Others, however, pay the full 15% rate,» explains Finance Ministry’s Direct Tax Department director Astra Kalane.

She says there will be winners and losers from the tax reform. Still, there will be more winners than losers.

PwC Latvian office manager Zlata Elksnina-Zazcirinska lists the losers from the tax reform: «State enterprises and large international companies that have invested infrastructure. Tax burden for them will definitely increase. Those who have never paid taxes to begin with will have to get used to the new reality.»

As for state companies, the law makes it mandatory for them to pay dividends, so they will have no choice.

But what should private businesses do? There are different options. More often than not, it is predicted that Latvia will have low corporate income tax revenue in the first couple of years after the reform, De Facto notes.

Finance Ministry says more taxpayers will appear in time, because the new model provides for applying taxes for costs not associated with main economic activities. «If a business that is not mainly engaged in provision of services in the tourism field, it will have to pay corporate income tax if it buys a yacht,» Kalane explains.

For Estonia, it is typical for businesses not always investing profits back in production. They do keep money on bank accounts, LTV programme notes. «In worst case scenarios, businesses lend money to the mother company to avoid paying dividends. Changes accepted in Latvia do not provide for prevention of unjustifiably cheap loans for associated persons.»

De Facto was told by certain tax consultants, there will be businessmen who will use the advantages of the new system to empty accounts and disappear without paying taxes.

Ref: 224.109.109.5209


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