Financial Services, Latvia, Taxation

The Finance Ministry has proposed to change distribution of personal income tax between the state and local government budget. At present local governments receive 80 % of personal income tax, while the remaining 20% are paid into the state budget. The Finance Ministry has proposed to change this distribution ratio to 75% and 25%.

As a result of this redistribution, local government budgets would lose EUR 91 mln.

The proposal to raise the threshold for differentiated non-taxable minimum income to EUR 1,800 a month would mean that local governments will receive by EUR 31.2 mln less in their budgets.

At the same time, additional EUR 5.8 mln will be collected into local governments' budget in the mandatory state insurance contributions are in reduced from the current 35.09% to 34.09%. Local governments will be able to collect additional EUR 11.8 mln if the minimum mandatory social insurance contribution and tax on turnover is introduced.

The Finance Ministry has estimated that as a result of the proposed changes, local governments will see a drop in their revenue by EUR 104.6 mln.

Prime Minister Krisjanis Karins (New Unity) said earlier that the new tax proposal will help to find funds for raising wages for teachers and medics, as well as ensure the guaranteed minimum income. He also said that local governments will be compensated for the cuts in the budget from the EU "recovery fund" worth EUR 2 billion.

Meanwhile, Gints Kaminksis, the chairman of the Latvian Association of Local Governments (LPS) criticized the Finance Ministry's proposal in an interview with the Latvian public radio, said that it means a considerable drop of revenue for local governments that cannot be compensated with the promised EU funds. He said that the EU funds can be spent on particular projects, while local governments need money to finance their direct functions.