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Tuesday 20.02.2018 | Name days: Smuidra, Vitauts, Smuidris
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Expert: it is hard to be an honest taxpayer in Latvia

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThere are multiple flaws in Latvia’s tax system. Low tax collection is caused by high grey economy proportion, not low tax rates. The tax burden for honest taxpayers in Latvia is rather high. This especially applies to labour tax, economist Uldis Rutkaste says about Latvia’s tax reform.

It is mentioned in the Tax Report compiled by the Bank of Latvia: «During the economic crisis, Latvia’s government was forced to increases taxes to improve the country’s financial state. In the period after the crisis, on the other hand, it is necessary to switch focus from quantity to quality and think more about the national economy’s future development. Latvia requires competitive businesses to reach higher welfare for residents, higher tax collection and lower inequality.»

The economist mentions that businessmen and trade unions have lately been criticizing the government’s tax reform. Confused, they ask – what will tax reform proposals mean for Latvia’s national economy?

Rutkaste, about the current situation in Latvia: «By applying all kinds of taxes on income, Latvia has created a tax optimization paradise. In addition to the fractures tax base, complex and often changing tax regulations, high bureaucratic burden and low state tax collection capacity create fertile ground for tax consultancy business. There are companies that use such conditions to their advantage by legally reducing the amount of taxes they pay. This does not benefit the national economy in any way.»

The most important proposals for Latvia’s national economy are described in Tax Strategy 20/20 of the Bank of Latvia.

The proposed tax reform resolves all of the aforementioned flaws. Reduction of PIT would help reduce labour tax burden. Tax optimization options are narrowed down significantly with the introduction of a unified 20% tax rate for all forms of income – wages and dividends, said the economist about the way to resolve Latvia’s situation.

Rutkaste mentions that companies that decide to invest money in development will be offered investment stimulus in the form of 0% tax rate for re-invested profits. ‘Such tax system changes will significantly reduce businessmen’s motivation to work in grey economy and motivate them to be transparent. It will ease the attraction of funding from banks and other investors in the future, creating wider development opportunities. Reverse VAT payment order proved its effectiveness in combating tax fraud schemes,’ the economist says about proposals.

Winners and losers

«Hired workers will definitely benefit from proposed changes. Reducing PIT from 23% to 20% and increasing the non-taxable portion of income would increase wages for all workers. Although this will reduce state budget income, increased expenses of residents will contribute to growing consumer taxes (VAT and excise taxes) and thereby partially compensate PIT income decline,» predicts the economist of the Bank of Latvia.

BNN had previously reported the opinion of Arnis Sauka, associated professor of Stockholm School of Economics in Riga. «Discussions about relatively high labour tax burden have been continuing for some time in Latvia. In this context, the reduction of PIT on labour force from 23% to 20%, even not in all cases as the reform suggests, seems like the right decision to help reduce the proportion of envelope wages. Minimal wages can be increased safely even under high presence of envelope wages. This initiative, I believe, is praiseworthy. It can serve as a good instrument for combating envelope wages,» said Sauka.

Corporate Income Tax reform’s result will benefit all businesses in a long-term perspective. Small and medium-sized businesses will benefit the most, because the current CIT regulations are the latest beneficial to them. On top of that, additional income is expected for service providers and development-focused businesses. Adding PIT reform would benefit businesses with high labour costs.

The economist of the Bank of Latvia comments about Estonia’s experience: «Looking at Estonia’s experience, where similar CIT regulations have been in place since 2000, it becomes clear that both the state and businesses benefit from it. Colleagues of Estonia’s Central Bank included in their study business-level data. Comparing data from Estonia, Latvia and Lithuania, it can be concluded that CIT reform in Estonia has significantly improved financial health of its businesses, which has also helped overcome the crisis and improve growth of the national economy through higher investments and more rapid productivity growth. Improving funding conditions has helped increase finances and reduce debt burden.»

Estonia’s experience also shows that this reform has also helped improve the liquidity of small and medium-sized businesses and offering positive contribution to a wider range of businesses, says the economist.

The expert says that the new tax system will not be profitable for fraudsters: «Speaking of losers, grey economy employees and tax fraudsters will be among them. Even certain large businesses that previously invested large amounts of money into production machineries and now plan to divide profits from future years into dividends will have to pay higher taxes. However, they will be able to continue investing in business development without paying CIT at all. Labour force tax burden will reduce as well, and this will help reduce overall expenses for businesses,» the economist said.

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