Vjacheslavs Dombrovskis

The inter-ministerial work group on Real Estate Tax (RET) reform began its work in the end of June. The goal of this group is the offer a kind of tax model that would cover realistic taxpayer income, as well as ensure the transfer of the tax burden from workforce to real estate. If the RET reform is managed to be implemented on January 1, 2014, it will be possible to reduce PIT to 16%.

Comrade of the Chairman of Reform Party (RP) Vjacheslavs Dombrovskis notes that the current Latvia’s tax system is ineffective and unjust. One of the main reasons for this is the large workforce tax burden that indirectly contributes to envelope salaries and maims competition between taxpayers and non-payers. This so called “tax wedge” in Latvia is two times larger than, for example, in Ireland.

«In order to improve economic growth and social trust, the tax burden needs to be transferred from workforce to real estate property. The first step was made when the Saeima adopted amendments that provide for the gradual reduction of PIT starting from January 1 within three following years by 5%. A RET reform is necessary to achieve further PIT reduction for 4%. As a result, PIT reduction will reach 9% in three years. It will be reduced to 16%,» – Dombrovskis says.

He adds that RET has two functions. First – it effectively replaces PIT, because salary income and deal prizes can be relatively easily hidden, including envelope salaries, while income from real estate deals are not hidden as easily, which complicates the possibility to avoid paying taxes. No kinds of creative accounting methods can help in this situation. Second, the RET is directed towards the wealthier class of residents that usually own more expensive property.

However, as RP representative says, there will be winners and there will be losers. «It is impossible to hide real estate property. It is also impossible to avoid paying the RET. So, the ones to lose the most as a result of this reform are those that avoid paying the workforce tax – envelope salary recipients and residents with large income, including businessmen. This group of residents pay a larger amount in taxes from their realistic income. So the biggest winners from this reform will be residents with medium and low income – the total tax burden will decrease for them. Families with children will also be among the winners – the new model will allow them to receive benefits,»- the politician notes.

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