It is planned that next week i.e., 3 May, the government will decide on the Latvian tax reform guidelines and further progress. As per the current government’s position, changes in the law should be developed and adopted in parliament by end of this year. Thus, it is expected that all changes should enter into force by 1 January 2018.
Labour tax reform guidelines. The aim of the reform is to reduce burden of the personal income tax (PIT) and increase income of working population by setting a lower personal income tax rate for lower income, raising the non-taxable minimum for PIT and an increase in the minimum wage.
The PIT rate is expected to decrease from 23% to 20% of income which does not exceed 45 000 euro per year and for revenues exceeding the said amount – 23% PIT rate. In addition, it is planned to harmonise the personal income tax rates for different types of income in order to reduce current inequality whereas the most prosperous part of the population receives income from raise of their own capital while tax rate is lower than for employment income.
The guidelines intend to increase the minimum monthly salary from 380 to 430 euro, the non-taxable income up to 250 euro and change the existing differentiated taxable income application during the taxation year instead of summary procedures. It is planned to increase also the amount of tax deduction for a dependent up to 250 euro (currently 175 euro).
Regarding the income from capital, increase of capital and income from rent / lease from the sale of growing forest and other income, it is planned to establish a 20% personal income tax rate. The tax will not be levied on dividends if it will already levied to 20% corporate income tax at profit distribution time.
It is planned to abolish the solidarity tax and introduce a two-tier statutory social insurance contributions (SSIC) “ceiling” up to 55 000 euro where SSIC would be applied in accordance with general procedures, ensuring all social insurance services. For annual income exceeding 55 000 euro and below 95 100 euro the contributions to be made as per general arrangements but only for pension insurance levels 1 and 2. For annual income above 95 100 euro, the contribution should not be made. The SSIC would not be paid for the income which does not exceed 430 euros per month.
Also, it is planned to organize so-called “small” tax regimes taking measures to improve control of micro enterprises by the State Revenue, increase the maximum salary threshold, define a lower threshold for micro-enterprise turnover and improve the patent fee regime for small businesses.
Corporate income tax (CIT) reform. It is expected that the income tax will be paid at the time of profit-sharing rather than from profit gained, by the applying 20% tax rate (i.e., costs that are not invested in the company’s development, including dividends, non-business related expenses, representation expenses that increase the defined amount, etc.). The guidelines provide that there will be a transitional period in cases where the tax payer has a CIT credit for investment projects approved by the Cabinet of Ministers until 31 December 2017. In addition, CIT credit will remain and will be applied in accordance with the Law “On Tax Application in Free Ports and Special Economic Zones” as well as support for donations will be determined as per the standards of public benefit organization i.e., amount of donation upon the donor’s choice: 10% of the reporting period profits or 3% of the reporting period of SSIC.
Value added tax (VAT). In accordance with the guidelines it is planned to expand the list of sectors for applying of reverse VAT payment procedures, reduce the VAT registration threshold of EUR 50 000 to 40 000 euro, assess the VAT reduced rates and so-called VAT optional provision efficiency.
Other measures. To compensate the state budget loss in result of the tax reform, it is planned to increase the excise duty on cigarettes, certain alcoholic beverages and certain petroleum products and review natural resource tax rates for air pollution.
In the context of tax reform, other activities are also envisaged and described in the national tax policy guidelines for year 2018- 2021. The draft guidelines in Latvian is available in the website of the Ministry of Finance: http://www.fm.gov.lv/lv/nodoklu_reforma/.
