The Latvian Economy - August 2017
Tax reform in Latvia – a small but worthy step in the right direction

Tax reform package passed by the Parliament on July 27 involves changes to the labour, corporate, and excise taxes, as well as measures to combat shadow economy. Overall it is a move in the right direction, with more to be done. The reform will have a small but positive effect on the economic growth. A lot of the success will depend on the efficiency and responsiveness of tax authority and society’s willingness to cooperate.

Effect on households:

• Net wage about 4-4.5 percentage points higher next year (especially for small and medium wage earners);

• Inflation 0.8 percentage points higher next year, significantly less than the net wage growth;

• Motivation to legalize envelope wages insufficient;

• Higher social security contributions for reduced income tax regime users (e.g., recipients of royalties and economic operators), stricter eligibility requirements for microenterprise tax regime in the short term increase tax burden, but is a needed step towards more sustainable pension system; more to be done.

Effect on businesses:

• 0% corporate income tax rate for undistributed profit to push for more transparent corporate financial flows and improved investment activity in the medium term; together with a 20% (currently, 23.5%) tax on distributed profits to reduce the tax burden for most businesses, except a few large companies negatively affected by the discontinuation of most corporate income tax deductions (e.g. accelerated amortization)

• Minimum wage hike and higher social security contributions will increase labour costs, but pressure to increase gross wage likely to be a tad lower due to in general lower labour tax wedge;

• Labour tax wedge for sole earners still to remain the highest in the Baltics;

• Measures to combat grey economy, especially the extension of the reverse VAT charge, will make it harder to work in shadows.

Overall effect on the GDP growth and income inequality:

Higher consumption boosting economic growth in the short term, healthier business environment and increased investment activity; less income inequality within the working population.

Main risks:

Red tape, poor government communication leading to lack of cooperation from the society.

PDF The Latvian Economy - August 2017

For more information please contact Ms. Agnese Buceniece, +371 67445875, agnese.buceniece@swedbank.lv 

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