The Latvian government approved the project of the state budget for 2014 this week. This is the firs time in Latvia’s history when its budget was compiled in euro. This is also the first time since 2008 when the expenses of the state treasury have gone up.
Budget deficit has been set ad 0.9% of GDP. Consolidated budget expenses are planned at EUR 7.14 billion, which is nearly 3% more than this year’s expenses. The last time budget expenses were set at EUR 7 billion was in 2008.
The growing appetites of the government sector are planned to be sated at the expense of increasing budget revenue policy. It is planned that next year’s budget revenue will reach EUR 7 billion – nearly 5% more than planned for 2013. Positive fiscal influence over revenue – more than EUR 70 million – will be provided by a number of tax changes (increase of LPG excise tax and gambling tax, adoption of natural resources tax and fees for cargo vehicles to use state roads). The most significant change – adoption of a tax on energy subsidies. It is planned to bring the state budget EUR 41.3 million.
According to Finance Ministry, the main twist of the 2014 budget is the measures planned for covering the gap in the income of different social groups. Measures include the increase of tax-free allowance (from EUR 65 to EUR 75) and dependants benefits (from EUR 114 to EUR 165) and minimum salaries (from EUR 285 to EUR 320).
Catastrophe for small business
There have been many tax initiatives presented last week. One of them is the gradual increase of micro-enterprises tax (MET). The Budget-Finance Commission has reached an agreement in regard to this measure. According to the plan, the tax rate will be increased 2% every year starting with 2015. This will continue until the rate of this tax reaches 15%.
The current 9% rate includes PIT, social insurance fees, corporate income tax and business risk fee. Only companies whose annual revenue does not exceed LVL 70,000 and the number of employees does not exceed 5 are eligible for this tax.
It is planned to increase this beneficial tax because its current rate does not provide workers with enough social benefits. It also spoils competition, deputies believe.
“It spells catastrophe for the small business sector,” – claims Chairman of the Latvian Chamber for Commerce and Industry Jānis Endziņš. He was one of the initiators behind the introduction of the beneficial regime three years ago. According to him, the adoption of micro-tax allowed the legalization of dozens of millions of lat. Increasing this tax will encourage companies to return to “the shadow”.
According to the data of the State Revenue Service (SRS) there are currently 31.33 thousand micro-tax payers in Latvia.
In order for the commission’s proposal to come in force, it needs to be approved by the majority of the parliament. The date is not yet set for the review.
Bosses need salaries to work
The goal of another tax initiative is the have managers of small firms pay social insurance fees regardless of whether or not they are paid salaries. It is planned to be adopted on January 1, 2014.
According to the current legislation, a Chairman or Board member has the right to work without a salary. This also means he does not have to pay social insurance fees. This practice will be ended: if a firm had no workers in the previous year but turnover was above EUR 7,000, the social insurance fee for the firm’s managers will need to be paid.
According to Welfare Ministry, business with no workers and “free” managers exists only for tax optimization and the financing of illegal employment. According to entrepreneurs, this type of business structure is often used by starting businessmen (especially in the countryside): they do not want to hide in the shadows but are not yet able to amplify their economic activities.
Latvian Association of Small and Medium Enterprises has already announced its intention to protest this decision in the Constitutional Court of Latvia.
Entrepreneurs do not like surprises
The Economy Ministry is hard at work developing amendments to regulations to make sure tax rates change no more often than once a year.
Amendments will also state that if there are significant changes added to regulations and cover the amount of information that needs to be provided in declarations, such amendments are to come in force in six moths after their approval. This will allow both taxpayers and SRS to prepare for such changes in a timely fashion.
Latvia’s legislation undergoes changes very often. The Law on Taxes and Duties changed several times per year. Business representatives call to have tax rates be allowed to change only once in two or three years.
Latvian Association of Local and Regional Governments is against this initiative. Municipals believe tax rates are an important factor when planning revenue and expenses. The period of one year is too short for this process. The organization believes this period can be extended to two years.