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World Bank: Latvia will have to take difficult decisions to increase tax revenue

BC, Riga, 22.06.2016.Print version
There are options for Latvia to increase tax revenue but difficult decisions will be required and major adjustments will have to be made to the tax system, the World Bank experts have concluded, informs LETA.

Latvian can increase its tax revenue by broadening the tax base, raising tax rates and reducing tax evasion, according to a presentation prepared by the World Bank economists that was shown to politicians and experts in Riga last week.

 

According to a copy of the presentation obtained by LETA, corporate income tax revenue in Latvia is low compared to other EU and OECD member states. Complexity of Latvia’s taxation of business income creates distortions and inequalities, the World Bank experts said, suggesting that Latvia should broaden tax base, revise tax rebates and restrict loss relief.

 

Value-added tax (VAT) is fairly broad-based with standard rate that is close to the EU average but a significant amount of VAT revenue is lost due to tax evasion and avoidance. The World Bank said that actions to target improved tax compliance were a priority. To this end, causes of VAT gap should be investigated and then tax administration measures should be targeted at major areas of non-compliance.

 

Differentiated VAT rates should be used for two potential reasons: reducing labor market distortions or income redistribution but in latter case direct provision of income support is more effective, the World Bank experts said.

 

They also criticized the existing micro enterprise tax in Latvia, saying it had negative impact on social security system due to inadequate social protection for employees (reduction in contributions) and adverse impact on personal income tax revenues. In addition, micro enterprise tax shifts economic activity away from larger companies to smaller businesses and may inhibit innovation/expansion. The recommendations include gradual phasing out of regime to shift firms/workers back to general tax regime, possibly combining this with introduction of targeted tax relief for new business start-ups.

 

As regards personal income tax, the World Bank suggests Latvia should consider policies to introduce a non-linear tax schedule and reduce the tax burden on low-income workers, namely, a multiple tax rate system, for example, having a lower bottom and higher top rate (as in this case there is no need for differentiated non-taxable minimum).

 

The World Bank experts have proposed a three-rate personal income tax – 19%, 23% and 29%. The lowest rate or 19% would apply to monthly wages up to EUR 360, the 23% rate would apply to wages between EUR 360 and EUR 1,300, and 29% will be charged on wages above EUR 1,300.

 

The World Bank also noted that the gap between rich and poor in Latvia is wider than in most EEA countries, including popular destinations of Latvian emigrants. Reducing inequality involves not just taxes, and benefits play an important role.

 

As reported, Latvia has concluded an agreement with the World Bank whose experts are assessing the equity and efficiency of the Latvian tax system. The World Bank aims to review the current tax system in Latvia through a lens of efficiency, competitiveness, revenue mobilization and equity. The World Bank's findings and recommendations will be used when preparing Latvia's tax policy guidelines for 2017-20 and drafting the 2017 national budget.

 

The Latvian government and business representatives will discuss the World Bank proposals to Latvia regarding taxation in fall, Prime Minister Maris Kucinskis (Greens/Farmers) told the press today.

 

The government’s social partners – the Latvian Chamber of Commerce and Industry and the Latvian Confederation of Employers – have organized a working group, and a trilateral meeting is planned in fall this year to go over the proposals, the prime minister said.

 

He said he was in favor of progressivity of taxes but the question was about how achieve it – whether using tools such as minimum non-taxable income or introducing progressive income tax.

 

Latvian Finance Minister Dana Reizniece-Ozola (Greens/Farmers) said on Monday that the World Bank had advised Latvia setting progressive tax rates on labor. The World Bank proposes to set personal income tax rates in the range from 19% to 29%, where the lowest threshold would be EUR 360 and the highest EUR 1,300.

 

Other preliminary recommendations from the World Bank include revision of business tax rebates and the regulations concerning micro enterprises.

 

As reported, Latvia has concluded an agreement with the World Bank whose experts are assessing the equity and efficiency of the Latvian tax system. The World Bank aims to review the current tax system in Latvia through a lens of efficiency, competitiveness, revenue mobilization and equity. The World Bank's findings and recommendations will be used when preparing Latvia's tax policy guidelines for 2017-20 and drafting the 2017 national budget.






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