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Wednesday 26.07.2017 | Name days: Ance, Anna, Annija
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Economic Diary of Latvia. Innovative approach towards tax policy

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThis week, Latvia’s Saeima conceptually supported legal drafts that provide for raising micro-enterprise tax rate from 9% to 15% and refusal of introduction of minimal social fees starting from 2017. This means the end for the story that riled up the population at the end of the year. Or perhaps it’s just the beginning.

In any case, it was necessary to bring at least some clarity to this matter to avoid ruining the holiday for people. Whether or not this is the end for any more changes for this tax is unknown. Amendments to Micro-enterprise Tax and mandatory social fees were approved with support from opposition parties. Unity, during whose reign questionable changes to regulations were first approved, abstained from the vote.

But the fact that yet another attempt to preserve the beneficial tax regime was rushed means this is not the end for changes.

It is also worth mentioning that it is planned to approve amendments in the final reading on 20 December. Entrepreneurs can apply for a transition to a regular tax regime or close their business before 15 December. Perhaps it is just an unfortunate turn of events, but it is only recently that the State Revenue Service commenced ‘modernization of information systems’ (at least that was what the official announcement from the company stated). The electronic declaration system, coincidentally, was offline. Other problems with services at www.vid.gov.lv were also noted. Later, SRS offered its apologies for inconveniences and said any declarations and documents with submission deadlines set for 15 December would be allowed to be submitted once the function of the institution’s information systems recovers.

Head of SRS Ilze Cirule admitted feeling some guilt over the fact that there is no clarity over what will happen in 2017, because SRS is the bridge that connects taxpayers and tax policy developers. According to her, SRS is the first to feel the pain of residents.

This does sound sincere, but it does not help resolve actual problems. Latvian Association of Regions, meanwhile, uses the clumsy attempts of ruling politicians to dance around micro-enterprise tax and mandatory social fees problem. The party has collected a whole ten signatures in favour of requesting Finance Minister Dana Reizniece-Ozola and Welfare Minister Janis Reirs to step down from their posts.

Someone has to take responsibility for the chaos in the country’s tax system, for the failure to fulfil previously given promises and the reduction of competitiveness of small enterprises, says the party’s chairman Martins Bondars.

Making a mess of things

Although the position of LAR may seem populist, it is correct in a way. President Raimonds Vejonis is also displeased with the way coalition parties work on tax matters. After meeting with Prime Minister Maris Kucinskis, the president said politicians have made a mess of things. Vejonis sees it unacceptable that discussions of important tax matters are discussed at the last moment. The head of state is unhappy with the situation when laws are not fair towards employers and employees.

Society views the tax policy as unjust as well, as announced by SKDS manager Arnis Kaktins at the recent financial forum for taxpayers. He presented survey results regarding society’s attitude towards taxes. 42% of respondents said taxes in Latvia are used irresponsibly and inappropriately. A large number of residents also prefer to be paid a large salary now than be paid pension and social benefits later.

This week’s published and revealed study of the tax system by the World Bank caused a wave of criticism among people. Moreover, this study will be one of the primary documents that will be used for discussions of the future tax strategy, which is planned to be approved before 1 April 2017.

In particular, the World Bank notes that Latvia can increase tax revenue to 32% of GDP by raising taxes, expanding tax base and better monitoring tax payment procedures. According to experts of the World Bank, micro-enterprise regime is one of the ways people can avoid paying taxes. The World Bank believes micro-enterprise tax should be abolished in favour of tax benefits for new companies and startups.

The bank’s specialists believe the country should charge corporate income tax in the majority of cases, as well as review benefits for this tax and change VAT rates for services like hotel and heating services.

It is also noted in the study that Latvia does not charge enough capital taxes; real estate tax revenue is relatively high but below the average in the EU. Analysing the excise tax in Latvia experts of the World Bank came to the conclusion that there is not a great deal of opportunities to increase rates in this field. The World Bank does nonetheless recommend discussing the matter of increasing fuel tax. It is also recommended to differentiate the tax on cigarettes.

Ahead of the entire planet

Beneficial tax regime for startups is already in place in Latvia. Not only is it attractive to local companies, but also companies from neighbouring countries. After the Seimas approved tax benefits for innovative businesses, taxation of startups in Lithuania became three times larger than in Latvia. Lithuanian startup community has already begun discussion the option to move to the neighbouring country, as reported by Lietuvos zinios.

According to Cobalt law firm associated lawyer Elana Vegelite, Latvian-based startups will pay a fixed tax rate of EUR 252 a month from salaries that do not exceed EUR 4,050 during the initial stage. If a startup pays a salary of EUR 1,200 to an employee, it is also expected to pay 21% PIT and social insurance fee. In Lithuania, tax rate for the same salary size is 54.98%.

The law that comes into force 1 January 2017 provides that all tax payments and social fees for startup employees with science degrees or work experience of more than five years are compensated by the state. Furthermore, the law introduces a tax plan for startup employees regardless of their level of qualification. The plan provides for the payment of taxes worth EUR 252 a month regardless of salary size while retaining minimal social guarantees.

Previously, nearly half of expenditures of startup companies in Latvia composed of PIT and social fees. The tax on salary paid to highly qualified employees was roughly the same size as their salary.

It is expected that this innovation will potentially double the inflow of venture capital in Latvia’s startup industry and will make the country more attractive for IT businessmen.

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