Financial Services, Latvia, Legislation, Taxation

Economy Minister Artis Kampars (New Era) said at the National Economy Council's meeting that even though a higher VAT tax rate would diminish residents' purchasing capacity, it would not have a significant effect on local enterprises and producers, and it would also limit shadow economy's expansion.

The report by the Economy Ministry's task force informs that increasing the VAT rate will be considered if reducing costs and other ways to increase budget revenue do not produce the desired fiscal effect.

The report also states that compulsory state insurance payments could be increased four percentage points, and progressive tax could be introduced in 2011.

The task force states in the report that taxes on labor must not be raised as it could damage Latvia's competitiveness and promote unreported employment.

Because of the need to increase budget revenue, the task force suggests to expand the base of income tax and property tax, as well as to introduce capital gains tax and property tax.

If personal income tax rate is set at 10%, the 2010 budget revenue could increase LVL 14.7 million.

The report also proposes altering the criteria for microenterprises' status – net turnover must not exceed LVL 7000 a year, and microenterprises must have staffs of no more than five.

The task force's proposals also envisage renewing corporate income tax breaks for large-scale investments made within a specific period of time, as well as reducing taxes on investments in technological equipment, which is hoped to increase the volume of investments in Latvia by 27.8% in five years.

The report states that the proposed changes must be introduced beginning January 1 next year.

The Latvian Employers' Confederation categorically objects to any new tax increases, as the confederation's director general Elina Egle stressed at a meeting of the National Economy Council today.

Egle called a report by the Economy Ministry's task force on the planned tax changes "blatant effrontery", and said that the Employers' Confederation would not support a single proposal regarding tax hikes.

All tax changes must be coordinated with the Finance Ministry's initiative to structure the state budget by appraising the usefulness of the current state functions. "The proposals to change the tax system that the Economy Ministry suggested today are completely out of context," said Egle, adding that it must be analyzed how tax changes would affect enterprises and residents' purchasing capacity.

Egle also believes that the work on the 2010 state budget will be very hard if the ruling coalition does not reach agreement on key state functions, so as to decide how much money must be allotted to each sector.

"The tax policy depends on the government's will to trim state functions," said Egle, adding that raising taxes is not the only way to have more money in the budget.

Egle also reminded that the Economy Ministry's task force set up to consider changing the tax policy did not include social partners' representatives, therefore no proposals from businessmen were included in the task force's report.