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Wednesday 26.09.2018 | Name days: Kurts, Knuts, Gundars
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Economic Diary of Latvia. Banking secrecy is no more

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU2016 is not far away so it is worth reminding that 1 January 2016 marks the entry into force of the Convention on Mutual Administrative Assistance in Tax Matters prepared by OECD. This document states that Latvia will become part of the automatic information exchange network in Europe.

Up until now information regarding taxes was exchanged only as part of administrative or criminal investigations. Now, on the other hand, financial institutions part of the information exchange system will have to report such information automatically.

In practice this means Latvian credit institutions and insurance companies will start providing tax administrations of other countries information about bank accounts and income of their clients. Local tax services will be provided with analogous information from foreign services. While there is currently no reason for concern, because the first exchange of information will take place in 2017 about information from 2016, it is worth keeping in mind that this law will make secrets apparent.

In particular, the 6th section of this convention provides for systematic and periodical exchange of information about taxpayers even if authorities have no suspicion regarding possible tax crimes.

Information that will be exchanged among tax administrations of different European countries includes data regarding investment revenue, account balance, information about interest or dividend income, income from selling financial assets of private and legal persons, etc.

63 countries have signed this convention and 50 of them have already realized it in practice. This includes Belize and the British Virgin Islands, as well as jurisdictions, companies of which are actively used in international tax planning measures: Singapore, Netherlands, Latvia, Lithuania, Lichtenstein, Switzerland and others. 38 more countries plan to join this convention by 2018.

Experts believe countries for which banking business is the key source of income will try to provide minimal information about their clients. Switzerland, for one, uses a ‘payoff tax’ in exchange for no requests from UK, Italy and other countries. It is possible that this practice will gradually develop with time in other countries as well.

What about businessmen who are currently trying to resolve problems of tax optimization and maintaining confidentiality by allocating assets abroad? One option is for them to return to their country and pay taxes in accordance to local rules and rates. Another option is for them to start using more complicated capital ownership structures. The third possible option is for businessmen to leave for countries that are not part of this new convention. There are people like that. The question lies in their readiness to relocate their assets in far-away countries and follow changes in legislation and economic situations there.

How low can you go?

Meanwhile the International Energy Agency published its latest World Energy Outlook this week. In it, IEA states that no quick oil price recovery is expected. This is because it is far more important for OPEC to increase its market share, even if it hurts value. Nevertheless, a significant decline of investments in the past year is only expected to help return the price of oil to USD 08 by 2020, as expected by IEA.

This outlook is important for Latvia because it allows for a rough estimate how long the country might remain in an area of low inflation.

This week, the Central Statistical Bureau of Latvia published information regarding the growth of consumer prices. Compared with September, prices had growth by only 0.3% in October. Price growth was so insignificant that the annual inflation index remains in the negative (-0.2%). Weak growth is dictated by low oil prices. Inflation will remain close to zero until the ‘black gold’ becomes more expensive.

Attempts to speed up inflation will continue in the world. Inflation has already reached the bottom in many countries. Similar to Latvia, inflation growth is returning very slowly. It is stimulated mainly by wage growth. Low resource prices, weak economic activity and unemployment remain as the factors that hold back inflation growth.

How to marry social responsibility and business?

In such a situation, social entrepreneurship becomes especially topical. It is often used as a tool to solve social problems the government simply cannot handle and businesses would rather avoid.

One of the problems in Latvia lies in the fact that established legal forms of enterprises do not comply with criteria of social entrepreneurship. For example, if it is necessary to involve volunteers in some project, a commercial established is unable to do that; if a social enterprise is founded for the needs of social entrepreneurship, the difficulty lies in the fact that NGOs cannot make profits.

In September, Saeima Social and Labour Affairs Committee created a work-group to develop a law on social entrepreneurship. The first conclusions will become known closer to the end of the month, at the next Social Entrepreneurship Forum.

In parallel to that, ALTUM financial development institution and Welfare Ministry plan to launch a programme to support social entrepreneurship in 2016. It will become a pilot project in Latvia for a new direction of state support. According to information from Welfare Ministry, EUR 14.9 million will be allocated for measures to support social entrepreneurship in 2016-2020. Most of this money (EUR 12.7 million) will come from the European Social Fund.

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