Financial Services, Latvia, Taxation

International Internet Magazine. Baltic States news & analytics Saturday, 04.12.2021, 07:14

Latvian Government approves proposal to carry out tax reform in 2021

BC, Riga, 02.09.2020.Print version
The Cabinet of Ministers on Wednesday approved the proposal to carry out tax reform in 2021, intended to promote the social protection of the country's residents.

At Wednesday's government meeting, ministers reviewed the Finance Ministry's report on tax policy initiatives aimed at promoting Latvia's social sustainability and economic competitiveness. The report contains tax proposals debated in various formats by the government coalition, the government's social partners and nongovernmental organizations. 

The ministry's report stresses fairness and simplicity as essential tax policy qualities, noting that the reforms are also intended to tackle people's social protection problems highlighted by the Covid-19 crisis. 

The government plans to phase in the tax reforms in three stages. In the first stage, which would come into effect from 2021, the rate of mandatory social security contributions would be cut by 1 percentage point and the threshold for differentiated nontaxable minimum income raised to EUR 1,800.

If the minimum monthly wage in Latvia is raised to EUR 500 as of January 1, 2021, the minimum security contribution will be EUR 170 per month. 

Also, minimum social security contributions would be introduced for employees that are paying reduced taxes and whose monthly income is below the minimum wage. Those employees whose monthly income exceeds the minimum wage, will pay 5% pension insurance contributions and 5 percent social security contributions.

Personal income tax rate on income exceeding EUR 62,800 per year would be reduced, and to balance the rates of the social security contributions and solidarity tax, the rate of solidarity tax would be cut, scrapping the personalized part of the tax. 

The government also approved the proposal to reduce the share of personal income tax revenue going to local governments' budgets from 80% to 75% and to increase the share of the tax revenue going to the central government budget from 20% to 25. As a result of this redistribution, local government budgets' are expected to lose EUR 91 mln.

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.

In all stages of the reform, excise tax will be gradually raised on tobacco products and taxes on motor vehicles indexed as Latvia pursues its environmental goals. 

According to the Finance Ministry's estimates, the tax reforms' negative impact on Latvia's 2021 budget will reach EUR 26.6 mln, but in 2022 the budget will gain additional EUR 56 mln as a result of the reform. In 2023, the tax measures are expected to provide additional EUR 76.1 mln in budget revenue. 

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