Business, Financial Services, Latvia, Society, Taxation

Liga Mengelsone, Director General of the Latvian Employers Confederation, said that some of the main targets Latvia is planning to achieve in the context of the tax reform include a 5%  annual GDP growth rate, a substantial reduction of shadow economy and more successful tax collection.

The tax reform is also aimed at increasing budget revenue and promoting the growth and competitiveness of Latvia’s businesses. Latvia’s residents, meanwhile, will have more money in their pockets after the reform, as it will increase the net wage of the low-paid employees.

The reform’s successful implementation will take public support and understanding, Mengelsone said.

Aigars Rostovskis, President of the Latvian Chamber of Commerce and Industry (LCCI), said that the tax reform must be carried out and that this is the right moment to do it. In his words, Latvia’s economic growth is currently picking up and revenues are flowing into the state budget faster than before. Nevertheless, the Latvian economy is still heavily reliant on EU funding.

He added that the birth rate in Latvia has also been declining, that the next working-age generation will be less active and that the population is shrinking. Tax policy plays a significant role in these process, it has to be favorable to businesses and students who in the future will be facing the dilemma between staying in Latvia or emigration.

Rostovskis also agreed that the proposed tax reform would stimulate economic activity, increase income for entrepreneurs and residents, improve the demographic situation and promote remigration. This would increase the number of taxpayers in Latvia, which is one of the main goals written in the agreement that has been concluded between entrepreneurs and the government.

Edvins Baldzens, the leader of the Free Trade Union Confederation of Latvia, said that the unions also consider the tax reform necessary. “It is extremely important to tie the growth of companies’ competitiveness to wage growth,” Baldzens said, adding that the tax reform would provide more money to the social budget, allowing to raise pensions and social benefits. The overall prosperity would increase.

The union leader also pointed out that the tax burden on employees in Latvia is heavier than in Lithuania and Estonia, which means that they receive less after paying taxes. It is therefore essential to reduce the shadow economy and migration of workforce to other, more affluent countries.

Bank of Latvia representative Uldis Rutkaste said that several contradictions have developed in the Latvian tax system over time. Although Latvia’s tax revenues against the size of the economy are smaller than in other European countries, the tax burden on law-abiding entrepreneurs is high, which can be put down to the large shadow economy.

To increase tax revenues, taxes cannot be hiked mechanically, because this would leave the Latvian economy less competitive in comparison with neighbor countries. The tax system therefore has to be revised, cutting taxes on labor.

The central bank’s representative also criticized Latvia’s tax regulations, which in his words have created a “small tax optimization paradise”. There are even legal ways for people to minimize their taxes, Rutkaste said.

As reported, the tax reform proposed by the Finance Ministry provides for cutting personal income tax rate from 23% to 20%, scrapping solidarity tax and leaving microenterprise tax in place.

The 20% tax rate would be set on personal income that does not exceed EUR 45,000 a year, and a 23% tax would be charged on income exceeding EUR 45,000 a year. The differentiated nontaxable minimum income would be significantly increased.

The minimum monthly wage would be raised to EUR 430 from EUR 380, and the nontaxable minimum income for pensioners would be raised to EUR 300 from 235. The ministry also proposes allocating 1% of social security contributions to the health sector.

As a result of the tax reform, the annual turnover ceiling for microenterprises would be lowered to EUR 40,000. The monthly wage limit for employees working at microenterprises would be raised from EUR 720 to 900.

The tax reform also calls for fixing the system of properties’ cadastral value, raising gambling and excise taxes, setting restrictions on tax refunds and stepping up the clampdown on shadow economy.