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Latvian government supports commencement of tax reform

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUOn Tuesday, 9 May, the government supported Finance Ministry’s prepared state tax reform guidelines for 2018-2021. The government will continue discussions about solutions for certain problematic matters, like funding for healthcare industry, until 1 June.

The guidelines for the tax reform provide for the introduction of two PIT rates – 20% for annual income under EUR 45,000 and 23% for income above EUR 45,000. It is also planned to raise non-taxable differentiated minimum to EUR 250 a month. The reform also provides for increasing benefits for dependents from EUR 175 to EUR 250 a month.

As a result of the tax reform, the non-taxable minimum for pensioners will be increased from EUR 235 to EUR 250 in 2018, EUR 270 in 2019 and EUR 300 in 2020. It is also planned to increase minimum wage from EUR 380 to EUR 430.

As part of the tax reform, it is also planned to change corporate income tax system, stating that this tax is to be paid at the moment of division of profits with 20% tax rate.

The reform is also expected to reduce the turnover threshold for micro-enterprise tax payers to EUR 40,000 instead of the current EUR 100,000, as well as establish 20% PIT rate on dividends and increase maximum wage restrictions. It is planned to improve the patent pay regime for small or ‘lifestyle’ businessmen.

The gambling tax rate for slot machines and gambling tables will be increased, and there will be a PIT rate for lottery and gambling winnings that exceed EUR 3,000. Considering the changes in excise tax rates in other Baltic States and the need to ensure regional competitiveness, the government plans to gradually increase excise tax rates.

The tax reform provides for establishing multiple restrictions for justified PIT expenses – general justified expenses for healthcare and education services, donations. This includes setting a cap for donations to political parties at EUR 600 a year for self and each family member, but no more than 50% of taxable annual income.

It is also planned to allow the transfer of unused justified expenses to the next three taxation years, as well as allow the recovery of justified costs for people with first and second disability groups if they are single and the taxpayer is their only relative.

The reform is also planned to ensure that the maximum size for deposits in private pension funds and life insurance bonus payments is EUR 4,000 a year and no higher than 10% of annual taxable income.

It is also proposed to restructure the rules that govern the application of justified expenses and develop transition rules for already signed insurance contracts and deposits to private pension funds – extending terms of life insurance contracts and securing stability for insurance bonus payments, as well as extending the holding period for contributions to private pension funds.

To maintain stability and predictability for municipal budgets in a medium-term perspective, Finance Ministry’s tax reform suggests using a mechanism that would provide municipalities with special grants. The size of grants will be calculated in the amount to ensure municipalities’ general tax revenue with special grants form 19.5% of general budget tax revenue.

Among the tax reform’s compensating measures is the expansion of VAT reverse payment order for construction materials, household appliances and metallic products. Finance Ministry adds that VAT rate itself will not be changed.

It is also planned to increase excise tax rates for alcoholic drinks, fuel and tobacco products. The matter with real estate tax will be resolved as well. The order that governs the payment method of vehicle operation tax will be kept the same.

The reform also includes grey economy combating measures, tax administration measures and improvements to debt collection processes and penalties policy.

The government plans to search for solutions to increase funding for healthcare to 4% of GDP in 2020. Debates are set to continue until June 2017. Members of the government will also search for ways to increase teachers’ pay.

Ref: 224.109.109.6098


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