Although entrepreneurs and foreign investors alike have mentioned the unpredictable nature of the country’s tax policy countless times, ministers pretend to have heard nothing. This week, for example, minister once again began reviewing the rules for micro-enterprises.
According to Finance Minister Janis Reirs, it is necessary to limit micro-tax payers in the rights to offer services to other legal persons in order to avoid distortion of this tax regime in the service sector. With that, micro-tax payers will be able to provide services to private persons only, but not mediators, who are mostly legal persons. This proposal was approved on Tuesday, during the meeting of the government and the review of amendments to the Micro-enterprise Tax Law before its submission to the Saeima for the second reading.
It is also planned to lift industry restrictions. As BNN had previously reported, the government has picked 37 sectors of the national economy in which it will be prohibited to found micro-enterprises. The choice of industries faced many criticisms. This is because the government has picked industries for the blacklist that mainly consist of industries most often picked by micro-enterprises. Now this blacklist is planned to be scrapped. A new approach is considered by the government.
The prohibition for micro-enterprises to provide services to legal persons will mainly impact large companies that have transformed entire departments into micro-enterprises in order to optimize taxes. This will also impact people offering legal, accounting, advisory, IT and many other kinds of services, because they provide services to companies as part of outsourcing services.
If this proposal ends up supported, it is likely there will no longer be any micro-enterprises left in Latvia, considering that 1 January 2016 marks the entry into force of amendments to the Law on Stat Social Insurance, which directly affect the state of Micro-enterprise Tax Law. According to amendments, micro-enterprise workers have to be appropriately socially insured. This is why it is planned to ensure that the size of mandatory state social insurance fees becomes equal to the size of social fees from employers and employees in the next three years.
In the first half of 2015, there were 96,836 micro-enterprise workers in Latvia. Their average wage was EUR 494. The size of mandatory state social insurance fees is equal to 40% of minimum wages in the country. With the adoption of mandatory fees per micro-enterprise worker will increase the genegal tax burden on micro-enterprises. It is estimated that it will be 22.6% in 2017 and 28.5% in 2018.
It is expected that the increase of the tax burden will lead to some micro-enterprises ceasing to exist. With that, it is also expected that the number of micro-enterprise workers will likely decline by 48,000 in 2017 and by another 14,000 in 2018.
According to estimates, only micro-enterprises whose tax burden does not exceed 25% will remain in 2017. There are approximately 15,900 micro-enterprises in Latvia that have this tax burden.
The micro-enterprise status was adopted in Latvia in order to assist job seekers. If a jobless person can find work by creating a micro-enterprise – why cut down the branch you’re sitting on? Isn’t it far more beneficial to allow people to fish on their own and not wait the fish to be carried to them in the form of unemployment benefits? But it seems the government is certain that micro-enterprises pose a threat to healthy competition. Latvia’s government intends to drastically reduce the number of micro-enterprises in the country. The tax regime once created to overcome the crisis reduces tax revenue, the government believes.
Two sides of the same coin
It seems Finance Ministry has decided that by pushing micro-enterprises into regular tax model, they will increase tax revenue. And money is needed much these days. As it turned out this week, the total financial deficiency in Latvia’s special budget is equal to approximately EUR 61.4 million. Retirement pensions alone require EUR 19.8 million. EUR 5.9 million is required for unemployment benefits, EUR 7.49 million for parent benefits, EUR 3 million for maternity benefits and other expenses.
Welfare Ministry ties the increase of expenses on unemployment benefits with the predicted increase of the number of recipients of these benefits – from 35,947 to 38,158 on monthly average. The number of recipients already exceeds the plan by 6.8%.
75.2% of funds planned for retirement pensions have been spent in nine months of 2015. The increase of expenses is explained with the increase of the size of new pensions. Last year, the average size of new pensions was EUR 273.19. This year, the amount has reached EUR 282 and the actual size of pensions has already reached EUR 302.72.
This week, Saeima’s Budget-Finance Committee decided not to oppose the initiative to increase expenses of the state special budget’s social insurance by EUR 61.38 million. It can be estimated that tax revenue will increase, including because of micro-enterprises. But there are also no guarantees that micro-enterprises will remain in the white zone. It is likely many of them will retreat to the shadows and the government will not receive anything at all.