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EY: long-term vision for systemic growth is next Saeima’s challenge in tax field

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe next Saeima’s main challenge in tax policy will be long-term vision for the system’s development, said EY partner in Baltic States and tax practice manager Ilona Butāne in an interview.

«We should have to ability to predict the evolution of the tax system in response to change of different medium and long-term factors, such as growth of productivity, welfare, population size and age, as well as change of economic conjuncture. Important matters include ensuring the systems stability, attractiveness and formation of reserves for problematic periods. Until now the government has not discussed these matters in depth even though discussions on those topics have taken place in academic and administrative offices. This is the main challenge – overcoming the usual short-term plans of the Saeima and instead planning long-term evolution of the tax system,» stresses Butāne.

She also says Latvia has only recently performed a tax reform. Because of that, it would be unfortunate to see new deputies to tackle new changes all over again. Instead it would be best to wait for several tax cycles to see how taxpayers’ behaviour changes.

«I believe there is a lack of understanding as to how residents and businessmen might act under the new tax regime and what consequences we can expect. What will people with large income do, knowing that a progressive tax rate will be applied to them? How will businessmen react, knowing that they will not have to pay corporate income tax, but requirements for proper accounting of non-economic expenditures will be much stricter than before?» asks Butāne.

She also mentioned Estonia, where the practice of applying zero corporate tax on reinvested profits has been present for a long time. «After many years without corporate income tax it has been concluded that businessmen simply choose not to divide profits – the tax ends up postponed indefinitely. As a result, Estonia is now forced to adopt new tax solutions. These challenges are what the future has in store for Latvia. Politicians will have to decide what they should do when the consequences of reforms appear,» said EY partner.

She also says tax collection problems are not associated with tax rates – rather it is because of grey economy. This is why combating VAT fraud schemes should become a priority, as should the matter regarding the reduction of cash circulation in the economy.

«Cash is the blood of grey economy – to pay envelope wages, one needs cash. This is where VAT fraud schemes come into play. Then this money ends up in retail trade sector. This circulation needs to be halted for good at some point. One way is banning cash deposit in ATMs – I’m not saying illegal money is deposited, but I see no legitimate reason why people should make deposits worth millions if all money is acquired legally. Such a step will definitely create pressure and force more transactions made using non-cash, because people have to pay leasing, loans, etc. In other words, they have to have money on their account, not in their pocket. Non-cash transactions are much easier to control from a tax administration view,» says Butāne.

She also mentioned that raising taxes would not be a good solution, because the tax burden should be measured in accordance to the welfare level in the country, and Latvia is significantly behind western countries.


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