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Non-taxable minimum and PIT rates proposed to be changed in context of tax changes

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Latvia, taxes, expenses, income, tax changesIn the context of upcoming tax changes in Latvia it is proposed to change the differentiated non-taxable minimum and PIT, as stated in tax policy guideline changes for 2021 to 2025 available to LETA.

At the same time, it is planned to raise minimal wage from EUR 430 to EUR 500 in 2021.

This is an offer from ministries and may change in talks with social partners.

The government’s action plan includes Finance Ministry’s goal to develop medium-term state tax policy guidelines by 31 March 2020. The goal of guidelines is ensuring support for improvement of quality of life, national economy growth and international competitiveness.

The offer presented by ministries urges a discussion of two PIT progressiveness scenarios, where each provides a number of variants for changing the current system.

The first scenario offers increasing differentiated non-taxable minimum and keeping PIT and solidarity tax rates unchanged. This scenario offers six options for income to be applied with differentiated non-taxable minimum.

The differentiated non-taxable minimum is proposed to be increased from the current EUR 300 to EUR 400 or EUR 500.

The first variant provides for keeping income applied with differentiated non-taxable minimum unchanged – EUR 1 200 a month if differentiated non-taxable minimum is EUR 400. This proposal would affect 65% employed people and would create expenditures of EUR 39 million for the state budget.

The second variant provides for increasing the income applied with differentiated non-taxable minimum – EUR 1 500 a month if differentiated non-taxable minimum is EUR 400. This proposal would affect 75% of employed people and create expenditures worth EUR 71 million.

In the third variant income applied with differentiated non-taxable minimum could be increased to EUR 1 800 if the differentiated non-taxable minimum is EUR 400. This would affect 79 – 80% of employed people and create additional expenditures of EUR 98 million for the state budget.

In the fourth variant income applied with differentiated non-taxable minimum could be increased to EUR 1 200 a month if the differentiated non-taxable minimum is EUR 500. This proposal would affect 65% of employed people and create additional expenditures of EUR 74 million.

In the fifth variant income applied with differentiated non-taxable minimum could be increased to EUR 1 500 if the differentiated non-taxable minimum is EUR 500. This proposal would affect 75% of employed people and create additional expenditures for the state budget of EUR 114 million.

Finally in the sixth variant the income applied with differentiated non-taxable minimum could be increased to EUR 1 800 if the differentiated non-taxable minimum is EUR 500. This proposal would affect 79 – 80% of employed people and create additional expenditures of EUR 148 million for the state budget.

If this scenario is implemented, its result may be an increase of net wage per worker between EUR 20 to EUR 29 depending on which one of the six variants is implemented.

The second scenario for PIT progressiveness provides for abolishing differentiated non-taxable minimum and solidarity tax and changing PIT rates.

Even this case offers two variants for the discussion.

The first variant offers not applying PIT for monthly income reaching EUR 310. PIT rate for income from EUR 310 to EUR 1 000 would be 20%, the rate for income from EUR 1 000.01 to EUR 4 000 would be 25%, and PIT rate for income above EUR 4 000 would be 36%.

The result of this variant would be that people whose income reaches EUR 500 would experience net wage change of around EUR 2. Those whose income is EUR 1 000 would get an additional amount of EUR 44.86, whereas those whose income is EUR 2 000 would get EUR 21.99. The wage group between EUR 500 to EUR 5 000 would create no additional costs for their employers.

The negative effect from this variant would be additional expenditures worth EUR 200 million for the state budget.

The second variant of this scenario offers not applying PIT on monthly income reaching EUR 500. PIT for income ranging between EUR 500 to EUR 1 200 would be 21%, the tax rate for income ranging between EUR 1 200.01 to EUR 4 000 would be 25% and the tax rate for income above EUR 4 500 would be 37%.

This variant would result in people whose income reaches EUR 500 experiencing net wage change of EUR 41. Those whose income is EUR 1 000 would get an additional amount of EUR 79, whereas those whose income is EUR 2 000 would get an additional amount of EUR 65. Those whose income ranges between EUR 500 to EUR 5 000 would not create additional expenses for their employers.

The negative fiscal influence of this measure for the state budget is estimated at EUR 470 million.

Welfare Ministry offers adding the topic of minimal monthly wages to the annual budget talks.


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