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Wednesday 29.01.2020 | Name days: Valērijs, Aivars

Economic Diary of Latvia. Latvia becomes a tax haven for Estonians

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe micro-enterprises tax, which is active in Latvia since 2010, attracts attention of local residents and neighbours from Estonia.

Many small and medium-sized entrepreneurs of this country have received offers to re-register their business in Latvia. Many of them are prepared to use this offer, as confirmed by ex-businessman and current deputy of the Estonian Centre Party Martin Repinski.

This scenario is especially possible for the IT sector, which has very strong positions in the neighbouring country. This particular industry also continues to develop rapidly. Activities of such companies are rarely tied to one specific place in the world. So they can be technically registered in any country.

Estonian companies, according to the deputy, are lured to Latvia using the lightened tax regime. It allows newly-created companies to pay only 9% tax from turnover for the first three years of activities. It should be added that this applies to companies whose annual turnover does not exceed EUR 100,000.

According to Repinski, Latvian legislation creates a better business environment for entrepreneurs. This motivated the latter to move their activities to Latvia. ‘I know businessmen who are prepared to do it. Unfortunately for Estonia, such a move would mean lost tax revenue and budget holes. For the latter, the government will have to search for new sources of funds,’ – believes Martin Repinski.

According to the deputy, Estonia needs to review its tax policy in regard to startups and liberate it.

1 September, 2010, marked the coming into force of the Micro-enterprise Tax in Latvia. By 5 May, 2015, Latvian State Revenue Service received a total of 63,008 applications for the provision of micro-tax payer status.

According to information from Latvian Finance Ministry, the share of micro-enterprise tax in the total number of taxpayers in Latvia reached 11% this year.

The lesser evil

The popularity of the aforementioned tax regime can be explained with high labour tax rates in Latvia. With that, the freedom of choice for small and medium-sized companies is rather limited – either pay a least something to the state budget or don’t pay anything at all and keep paying envelope wages to your employees. With that in mind, the micro-enterprise tax is the lesser evil. One of its initial functions during development was to reduce the share of shadow economy in the country.

However, according to results of the latest survey carried out by SSE Riga, Latvia does not seem to have a lot of progress in this field. In 2014, the share of shadow economy in the country was 23.5% of GDP, which is merely 0.3% below the index of the year before, as reported by SSE Riga representative Arnis Sauka.

For comparison, the proportion of shadow economy in Lithuania and Estonia was 12.5% and 13.2% of GDP, respectively.

Nevertheless, while the proportion of shadow economy in Latvia remained the same in 2014, its structure is what changed the most. 46% of shadow economy consists of unaccounted revenue from business activities (tax avoidance). 36.1% of shadow economy accounts for envelope wages. According to results of the survey, the latter has also become less common in Latvia over the last several years.

It is nonetheless a minor achievement, and Latvia should focus on much more complicated problems. As it was noted by ex-Economy Minister of Latvia Vyacheslav Dombrovskis this week, if Latvia does not achieve the average economic development level in the next ten years, the country’s very existence may be threatened.

Let’s drink for solidarity!

Some clarity in regard to refugee quotas surfaced this week. The European Commission has come forth with a proposal to accept twenty thousand refugees in the next two years, and let them enter in all EU countries except UK, Ireland and Denmark, who reserve the right to choose which refugees they accept.

The refugee quotas system will depend on the size of the country, size of economy and other factors. With this new system, Germany, France and Italy will be expected to accept the majority of refugees; this depends on whether or not UK will participate in the programme. Official offers for all EU member states will be revealed at the end of May.

Prime Minister Laimdota Straujuma has said parties of the ruling coalition are mostly negative toward the possibility of allowing refugees from Africa to enter Latvia. According to her, this position will be reported to the European Union on the June meeting of Meeting of Interior Ministers of the EU countries.

Latvian Interior Minister Rihards Kozlovskis was ordered to come up with a clear formulation of political arguments in accordance with which Latvia is not ready to accept the adoption of quotas for refugees. Nevertheless, Straujuma noted that Latvia is prepared to assist the EU with resolving the problem of inflow of refugees from third countries using other means. Proposed measures include strengthening of borders or provision of medical assistance.

Commissioner for Human Rights of the Council of Europe Nils Muiznieks criticizes this position. According to him, Europe’s existing system for accepting refugees does not function properly, and it’s not right to have Italy and several other countries to take on the bulk of responsibility for refugees. Muiznieks added that Latvia has to view the problem of refugees in a long-term perspective. ‘What will we do if a massive inflow of refugees comes to Latvia from the east? We will expect solidarity from others,’ – said the commissar.


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