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Tuesday 19.06.2018 | Name days: Nils, Viktors

Economic diary. Taxes as though a valve – turn it one way…

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThis summer, Latvia is expected to turn on the programme to support young families that wish to buy their first homes. Partners of the ruling coalition had reached an agreement on this topic earlier this week.

‘Economy Ministry has been tasked with developing Cabinet requirements for this matter, so that they can be approved by the government by July 1st,’ – said Prime Minister Laimdota Straujuma after the meeting.

It was initially planned to finance this programme at the expense of residence permits. However, the work on amendments to the Immigration Law is taking too long, and so it was decided to find funding elsewhere. As BNN had previously reported, the Finance Ministry (which had been sceptical about this programme) had suddenly found an available amount of EUR 2 million on the account of a recently founded development institution ‘Altum’.

According to estimates of Latvian Association of Commercial Banks, 14% (100,000) of Latvian households want to improve their living conditions in the next couple of years. Only 3% can afford to make the first instalment. It is planned that state guarantees will be made available to approximately 1,000 young families.

Truth be told, experts had previously stated that the effect from this programme may prove to be insignificant due to the lack of funding. A single family can expect to receive a guarantee worth EUR 2,000, which can cover the first instalment (10-20%) only for loans up to EUR 10,000-20,000. This amount of money can only afford a one-bedroom apartment in Riga. It is possible to live outside the capital.

Taxes are as though a valve

Continuing the housing topic, it is worth mentioning the proposal to amend the Real Estate Tax in order to allow the registering of rent contracts not just in the Land Book, but also in municipalities.

January 1st, 2014, marked the coming into force of amendments that obligate owners of apartment buildings to register rent contracts in the Land Book within one month’s time. This requirement also applies to individual apartment owners. However, this ‘formal’ real estate property is taxed (0.2 – 0.6%). Other types of real estate are to be taxed with a penalty of 1.5%. This measure is aimed at black real estate market, where all calculations are performed with cash, no rent contracts are signed, no owners and tenants are registered and no money is paid to the treasury.

But instead of adding changes to the Land Book, owners decided to pay increased tax by laying it on the shoulders of tenants. They are the ones who rebelled against having to pay increased tax for owners at 1.5% of cadastral value.

Because this tax is administered by local authorities, it was decided to amend the Real Estate Tax Law with a permit to register rent contracts in the Land Book or municipal governments. If the bill is approved by all parties of the ruling coalition, municipalities will be able to make it to the first half-year of 2014 to perform recalculations.

In line with others

If taxes are to be taken with utmost seriousness, Latvia is due to join the convention of OECD on the exchange of information about taxes. An appropriate decision was approved by the Saeima’s Foreign Affairs Committee this week.

Latvia’s admission into this mechanism will allow the country to receive the latest information from EU member states. It is planned that this step will reduce the possibility of tax avoidance. When the law on the ratification of the convention comes into force, Latvia will be obligated to provide the same information to all other member states. Finance Ministry will be responsible for coordinating information exchange from Latvia’s side.

As BNN had previously reported, last year, Latvia received an invitation to begin talks in regard to the joining of OECD. There will be a series of technical missions aimed at collecting additional information in the near future. It is expected that Latvia will join the club of the wealthiest countries of the world in 2015.

Just in case

In light of such a perspective, it is necessary to think strategically. This includes planning in a long-term perspective. The Budget and Finance Committee had approved a new redaction of the Law on Long-Term Stabilisation Reserve this week.

It is 2014, and the time has come to renew regulations. And even though it is likely the Stabilisation Fund will not have any income in the next three years due to the planed budget deficit, it is still necessary to approve amendments.

However, according to experts, authorities should have formed reserves over the course of rapid economic growth of 2004-2007. At the time, on the other hand, it was impossible to do, because rapid economic growth was accompanied by rapid increase of expenses.

Reserve funds similar to the one that is being created in Latvia already exist in other countries. Estonia had created its own reserve fund in 2007: reserves helped this country overcome the economic crisis.


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