Financial Services, Latvia, Taxation

During an annual meeting with representatives of the Latvian Association of Local and Regional Governments, the Finance Ministry presented its mandatory health insurance solution. The proposed reallocation of a portion of personal income tax revenue for health insurance would slash local authorities' income by EUR 140 mln, or 10%, the association's spokeswoman Liene Uzule informed LETA.

This would be the biggest reduction of the local governments' budget revenue since 2009 when the financial and economic crisis sent tax revenue plummeting.

The Association of Local and Regional Governments believes that the solution has to be seriously debated as any changes in tax rates and local governments' funding have to be proportionate. 

The reduction of the local authorities' income by EUR 140 mln would significant and in the current situation disproportionate, the association says, noting that the sum is equal to that spent by all local governments on social support measures, including various benefits and social services, in 2019. 

Furthermore, from next year, the local governments will need additional financing for increased payments of guaranteed minimum income (GMI) and housing benefits, among other expenses. 

At present, personal income tax is the local governments' main source of income, making up 85% of their total tax revenue. 

As reported, the Finance Ministry proposes reforming Latvia's tax system in three stages, introducing in the first stage a mandatory 5% health insurance payment without increasing the overall labor tax burden but instead redistributing the rates of state social security contributions, personal income tax and solidarity tax.

To prevent the tax burden on low and medium-income persons from growing as a result of the redistribution of tax rates, the differentiated nontaxable minimum income would be raised from EUR 300 to EUR 350 per month. It is also planned to introduce minimum state social security contributions for employees whose monthly income is below the minimum wage, as well as to reform the tax regime for micro-enterprises.

The second stage of the reform, which would come into effect from 2022, would affect business operators working in the general tax regime. Under the new rules, state social security contributions will be charged on all operating income from those business operators whose annual operating income exceeds EUR 20,004 (EUR 1,667 per month). In the third stage of the reform, which would come into effect from 2023, state social security contributions would be charged on all actual income on all levels of operating income, but no less than the minimum amount of state social security contributions.