Analytics, Financial Services, Latvia, Legislation, Markets and Companies, Taxation

Welfare Minister Ilze Vinkele (Unity) said in an interview with Latvian State Radio yesterday that reducing personal income tax two%age points next year is debatable, because it would mostly favor those who receive high salaries. The "absolute priority" of Vinkele and Finance Minister Andris Vilks (Unity) will be increasing non-taxable minimum income and tax breaks for dependants, because these are the instruments that could reduce poverty and inequality in Latvia, said Vinkele.

"The government must finally get used to keeping its promises! The tax burden on wages is too heavy, and any delays or the government's failures to keep its promises will only make the situation worse on the labor market, as well as increase the gap between Latvia and the other EU countries and contribute to migration of the labor force. Negative birth rate is a threat to the economy and tax collection amounts in the near future," said New Rosme CEO Edgars Stelmahers.

Balticovo CEO Arnis Veinbergs notes that revising personal income tax would reduce labor costs. "For businessmen this would mean less expensive and more motivated labor force, and therefore a slight improvement in competitiveness. Raising the non-taxable minimum would have a smaller effect on the fiscal policy. A lower personal income tax is a more efficient instrument for promoting competitiveness of Latvian businesses," he said.

Aldaris representative Laura Krastina said that her company overall approved of the government's initiative to reduce the tax burden on enterprises. "This is a fundamental way to foster local companies' competitiveness and reduce the shadow economy. The tax cuts trend is a good signal to not just companies that do business in Latvia but also to potential investors who certainly look at labor costs in every country," said Krastina.

Latvijas balzams CEO Guntis Aboltins-Abolins notes that a lower personal income tax will have a very great effect. "The proposal to reduce the personal income tax is commendable, provided that personal income tax is gradually lowered to the level of corporate income tax," said Aboltins-Abolins.

"Increasing the non-taxable minimum will have the greatest effect on low wage earners – at the moment, certain social groups prefer not to seek jobs but to live off benefits. If the non-taxable minimum is raised, more people will go to the labor market, which will have a positive overall effect. Increasing tax breaks for dependants from LVL 80 to LVL 98 a month also deserves praise, because in doing so, the state shows that it wishes to stimulate demography and competitiveness of wages," he said.

As reported, the government decided last year that personal income tax rate would be reduced five%age points by 2015. This year, personal income tax was lowered from 25% to 24%, it will further decrease to 22% in 2014 and 20% in 2015. The Reform Party has named reducing personal income tax its highest priority.

According to the government's plans, minimum monthly salary will be raised to LVL 225 next year, tax breaks for dependants to LVL 98, whereas increase in the non-taxable minimum salary will concern those who earn up to LVL 400 a month.