Ministers on Wednesday examined a report prepared by the Ministry of Finance on tax policy developments to improve the country's social sustainability and economic competitiveness. The report summarizes tax change proposals discussed in different formats among coalition parties, in negotiations with the government's social partners and non-governmental organizations.
The report states that justice and simplicity are an essential objective of tax policy and that tax changes are intended to address the challenge of the COVID-19 crisis in terms of social protection for citizens.
It is expected that tax changes will be introduced in three phases. The first phase of the tax change, which will take effect from 2021, aims to reduce the mandatory national social security contribution rate by one percentage point and to increase to EUR 1800 the income threshold to which the differentiated non-taxable minimum applies.
If, as from January 1, 2021, the minimum national salary is EUR 500, the minimum amount of social security will be approximately EUR 170 per month.
The FM report estimates that the biggest beneficiaries would be those earning slightly above the average salary in the country – EUR 1200 before tax.
“It also improves the competitiveness of our entrepreneurs, because it reduces production costs, and this reduction is not at the expense of employees, but at the expense of taxes, which is almost EUR 80 million,” explained Finance Minister Jānis Reirs (New Unity).
It is also planned to introduce a minimum social security in the general tax regime and in alternative tax regimes for employees whose monthly income is below the minimum wage level. It is envisaged that employees whose monthly income reaches or exceeds the minimum wage will make social contributions of 5% for pensions and 5% for social insurance.
There will be less money left for workers in alternative tax regimes. Everyone will have to pay at least EUR 170 per month for social protection. What to do if less earned, the government will still judge. It is planned that only pensioners and persons with disabilities will benefit from the patent fee regime, while the in micro-enterprise regime it is expected to increase turnover tax.
In order not to create an administrative burden, the reduction of the social security security rate is intended to reduce the rate of personal income tax to incomes above EUR 62 800 and, in order to balance the rates of the social security and solidarity tax, the rate of reduced solidarity tax is envisaged by waiving the personal share of the solidarity tax.
The government has also agreed to get money to raise salaries for medics and educators from local governments.
The government supported the proposal to redistribute the personal income tax from 2021 to the municipal budget from the current 80% to 75%, while for the general government budget from the current 20% to 25%. The planned changes in the distribution of personal income tax will reduce municipal budgets by EUR 104.6 million. Prime Minister Krišjānis Kariņš (New Unity) acknowledged that it will be too little to fulfill promises.
“The calculations show that we still have work well ahead. We must first come to an agreement in concrete terms, but it looks as if we will need to cut the planned current budget spending somewhere so that we do not grow our deficits above almost EUR 1.2 billion, which is almost 4% of gross domestic product,” said Karins.
The Latvian Association of Local Governments (LPS) objected to the changes and said that the reduction of over 100 million over one year was disproportionate. The government did not take into account the municipalities' request for the report to be postponed.
On the other hand, the FM proposal to opt out of royalties by 2021 was postponed by the government. It is concluded that this issue is sufficiently complex and still requires discussions. The proposed tax changes greatly infuriated musicians, actors, media workers and other creative professions. The Ministry of Culture also strongly opposed the changes.
In the second phase of tax changes likely to take effect from 2022, it is planned to make changes relating to the general scheme for economic operators, with an increase in social security costs of more than EUR 20 004 per year or EUR 1667 per month, i.e. income above EUR 20 004 per year for all social security payments. income from economic activity. Also, support measures for the implementation of tax policy developments for the automatic reimbursement of personal income could enter into force in 2022.
In the third phase of the tax changes that could take effect from 2023, it is planned to provide that, at all levels of income from economic activity, the social security shall be paid in full on actual income, but not less than the minimum social security.
At all stages there will be a gradual increase in the rates of excise duty on tobacco products, and vehicle taxes will be indexed following environmental objectives.
The FM has estimated that the budgetary impact of these changes will be negative at EUR 26.6 million in 2021, while the tax changes will result in an additional budget of EUR 56 million in 2022 and an additional EUR 76.1 million in 2023.
All changes will have to be decided on by the Saeima.