Tax reform bills pass first reading in Saeima

The legislative package related to Latvia’s planned tax reform passed the first reading in Saeima on July 22.

The tax reform bills were endorsed at a Saeima sitting that lasted nearly hours as lawmakers debated several reform measures at length.

Prime Minister Maris Kucinskis (Greens/Farmers) and Finance Minister Dana Reizniece-Ozola (Greens/Farmers) were also present to address the parliament.

Kucinskis said in his speech that the tax reform is one of the most important jobs of the incumbent Saeima. He reminded that the government had set two goals for the tax reform – to reduce social inequality and promote national economic development. The third task was to avoid reduction of budge resources and threat to the sectors that are financed from the budget.

Reizniece-Ozola, in turn, expects the tax reform to solve the problems of the present tax system. In her words, the tax reform will serve as a stable base for 5 percent growth of the gross domestic product, reduce inequality, increase budget revenues, cut shadow economy and improve work efficiency of the State Revenue Service. The minister said that the current tax policy increases inequality, hinders business competitiveness and is unfair, allowing to avoid tax payments.

The tax reform bills were mostly supported by coalition MPs, although some of them won the backing of the opposition as well. Some of the coalition lawmakers abstained from voting on certain bills. Several bills will be improved ahead of the second reading.

The second and final reading of the tax reform bills is scheduled for July 27, but if the Saeima sitting drags on, it will be interrupted and resumed on the following day.

The most sweeping reform is planned for personal income tax, the rates of which will be differentiated as of next year. A 20 percent rate will apply to annual incomes up to EUR 20,000, a 23 percent rate will apply to annual incomes from EUR 20,001 to EUR 55,000, and a 31.4 percent rate to annual incomes of over EUR 55,000.

Budget revenue from the so-called solidarity tax, which is charged on high salaries, will be used to finance health care and social security. One percentage point of the solidarity tax revenues will be spent on health care financing and six percentage points will be added socially insured persons' pension capital. Also, 10.5 percentage points of the solidarity tax revenues will be paid into the personal income tax account. The remaining part of the solidarity tax revenues will be paid into the pensions special budget.

Mandatory social insurance contributions will be raised by 1 percentage point starting from next year, and this revenue will be used for financing healthcare sector, according to amendments to the Law on State Social Insurance adopted by the Latvian government today. Therefore, mandatory social insurance contributions will amount to 35.09 percent - 24.09 percent paid by employer, and 11 percent paid by employee.

As of next year, people involved in economic activity and those earning author's fees and royalties will be required to pay 5 percent mandatory social security contributions in order to save up for pensions.

According to amendments to the Law on Corporate Income Tax, the payment of corporate income tax will be put off until the company's profit is distributed or earmarked for purposes that do not ensure the company's further development. Under the draft law, a 20 percent tax will be charged on dividends at the company level, while no personal income tax will be charged on the dividends paid out to individuals.

Amendments to the Law on Excise Tax, tax on lead-free petrol will be raised by 7.8 percent – from EUR 436 to EUR 470 per 1,000 liters in 2018. Excise tax on leaded petrol will be raised by 24 percent – from EUR 455.3 to EUR 564 per 1,000 liters. Excise tax on diesel fuel will be raised by 11 percent – from EUR 341 to EUR 378 per 1,000 liters, while excise tax on liquefied petroleum gas will be increased by 12 percent – from EUR 231 to EUR 206 per 1,000 liters.

Excise tax on cigarettes will be raised by 5.5 percent – from EUR 67 to EUR 70.7 per 1,000 cigarettes. Excise tax on wine will be increased by 18 percent – from EUR 78 to EUR 92 per 100 liters. Excise tax on beer might grow 24 percent – from EUR 4.5 to EUR 5.6 per percentage of absolute alcohol by volume.

As of next year, the microenterprise tax rate will be set at 15 percent and the annual turnover of microenterprises will be limited to EUR 40,000, according to amendments to the Microenterprise Tax Law the government approved yesterday.

The caps on the maximum pay for microenterprises' employees would be increased to EUR 900 a month from EUR 750 a month.

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