This is not an easy time. The crisis in our country coincides with the election period, and there are relatively many problems around us that should be urgently addressed. Also in the field of taxes. But either entrepreneurs have ever been afraid of problems! This is also discussed with Vita Liberti - our leading partner and attorney at law.
How's your tax mood this fall?
The question is timely because I recently returned from a business trip to Denmark and I really had some special thoughts on this topic. I was surprised to see how Danish society functions, how important the social contract is there. When you go out on the street, you can see that people respect the laws, accept the restrictions, while at the same time enjoying everything they get in return. Denmark is an excellent example that a social contract is possible and has obviously been implemented. I would like to go to something like that in Latvia as well.
Currently, one of the biggest problems in Latvia is that we do not believe in our country and the country does not believe in us. We pretend that everything is fine, yet we look at each other in disbelief. It is similar to business - if the company is managed by partners (by the way, this is exactly what we have done in the case of "BDO" for 15 years), then mutual respect and trust are important. If a person is not completely honest and does not fulfill his duties, does not pay taxes, but in return the state does not fully fulfill its promises and is therefore not honest, a good result cannot be achieved.
I recently read another study of the Riga School of Economics on the index of the shadow economy in the Baltic countries, which confirms that the size of the shadow economy in Latvia has increased again last year. In Latvia, a quarter of salaries are still paid in envelopes. Until we restore faith in each other and the country, until we start being honest with each other, taxes will be only a secondary issue.
Usually around this time we start talking and thinking intensively about next year's tax changes, but this year is different because October is election month and the only thing that is clear is that nothing is certain. What do you count on?
Historically speaking, in Latvia we expect a storm of tax amendments of one kind or another after every election, tax policy amendments are usually one of the points of the pre-election program, and later politicians often work on the promised implementation. Unfortunately, the result is unpredictable, initiatives may turn into other types of proposals during the course of work. For example, the corporate income tax (CIT) reform introduced in 2018 was not initially considered as a possible path for the further development of tax policy, but it had enough support – as a result, a completely new CIT law was adopted.
Currently, there is no information about fundamental changes in the main tax areas, even though, when running for the elections, representatives of all political parties have expressed several proposals for changes in the tax area. Mainly, proposals were made on more important topics for the society - value added tax (VAT) for certain types of services and products, as well as reduction of real estate tax (NĪN). Currently, no one is proposing to change the regulation of CIT and personal income tax (IIN).
Let's talk more about taxes! Latvia's labor tax burden is the highest among the Baltic countries at all salary levels. In recent years, this has been done to reduce these taxes a little, but what else do you think should be done in this area in the near future?
I wonder why the parties in power talk so little about this topic. We are uncompetitive in terms of labor taxes, and this affects more than just ourselves. Foreign investors can also quickly compare data, for example, on the scale of the Baltic states and understand that Latvia is in the worst position. Of course, taxes are not always decisive - if we could offer investors other benefits in return, such as an individual approach, an easier visa regime, investments in education, qualified labor and the like, everything would be fine, but we can't be proud of that either.
The digital economy is highly dependent on skilled labor, people are the most valuable resource of the 21st century, so it is more than strange not to think about it all. Currently, we have excellent opportunities to attract Ukrainians to the labor market, recently also Belarusians and Russians. We did not use it, we still think more about the geopolitical position than the economy of our country.
Focusing more on the tax aspects, the revision of the TIN Law with the aim of simplifying it has been a long-term plan of the Ministry of Finance, the business community and several business associations, which has still not been implemented. With the introduction of a new CIT regime on January 1, 2018, there were hopes that a new, simplified CIT regulation would also be adopted in parallel, but this was not done.
At a time when citizens are concerned about significant cost increases in many groups of goods and services, one of the possible solutions would be to reduce VAT, for example, on food. Why does the government not take this step?
This topic has been discussed for at least 10 years, we have also conducted several studies, but Latvia is not ready to go in this direction. Last year, the VAT on local vegetables was reduced, but it is likely to be canceled from next year due to the decrease in budget income. Maybe this is not happening because of the tax, but because the solvency of our citizens will decrease significantly?
It is clear that reducing tax rates would reduce budget revenues, which would increase the budget deficit, which could not be covered by other tax revenues, and there are always concerns about the abuse of incentives, that is, when the reduced tax rate would also be tried by those entrepreneurs for whom it is does not belong.
Perhaps there are other arguments, due to which the government decided to use one-time benefits and bonuses as a solution to suppress inflation, actually ignoring the experience and approach of neighboring countries and distant EU member states, which also includes reducing the VAT rate.
Another currently widely discussed tax is VAT. The public's misunderstanding here is related both to the general philosophy of paying tax for the home we have bought, and also to the justice in determining its amount.
Yes, but this is the easiest tax to administer, which cannot be avoided - the house is there, everyone sees it, it cannot be hidden. In this sense, it is a supportable tax because it requires minimal resources to administer. Another issue is the single housing and calculation system that creates inequality. Theoretically, the revenue from this tax is intended to enable municipalities to maintain their infrastructure, but since housing values are different, the amount of payments also varies from municipality to municipality. I don't understand how such a simple issue cannot be sorted out in such a small country, but it would be elementary to introduce the same rules for everyone!
Which tax do you think is important to talk about right now?
CIT! We took the idea of how to set this tax from Estonia, where it works successfully. The existing CIT regulation provides for the exemption from tax of reinvested profits, however, at the time of distribution of dividends, the tax rate is similar to the rates of Western European countries (25% of the gross dividend amount), which is high enough compared to neighboring countries (for example, in Lithuania the CIT rate is 15%, in Poland - 19% ).Since the European Union is moving towards a uniform 15% VAT rate throughout Europe, I think that discussions about this tax within our country will soon become relevant.
Currently, only the regulation of special economic zones has a significant impact from stimulating tax measures, and there is still a lack of innovative regulation that would be focused on attracting specialists and companies with high added value in Latvia, for example, you can consider the introduction of the so-called IP box regulation, or on fintech and the digital economy development-oriented measures.
I am also watching with interest the initiative on so-called "nomadic visas", which would allow persons who work for foreign companies to stay in Latvia, without the existence of a local Latvian work title being a criterion. I hope that the initiative will continue to be implemented and that VAT reliefs will be approved for such new taxpayers who are returning from abroad.
The more difficult things are, the more support people need from the state. To what extent can tax instruments help the economy? How can taxes and crises interact?
Tax regulation is recognized as one of the most influential instruments of economic regulation, its manifestation in one direction or another affects a wide range of issues at the same time - from employment, inflation, investment attraction to the shadow economy. Smart use of tax regulation has proven itself to be able to stimulate certain economic sectors, slow down the growth of inflation and reduce its impact, promote areas necessary for the development of society.
We should abandon the fear of moving tax regulation towards the needs of society, while at the same time taking responsibility for the decisions made. However, it should be taken into account that we are currently in a difficult situation, because the crisis coincides with the elections - no one is ready to express unpopular slogans.
Are other countries doing it more successfully?
The amendments to the VAT Directive allow each Member State to introduce a specially reduced VAT rate (below 5%) on food, water, medicines, pharmaceuticals, health and hygiene products, books and periodicals, passenger transport, as well as solar panels, and is already used by other member states, but not Latvia. Even though the idea of a reduced VAT rate for food has once again appeared, it should be taken into account that the majority of the Saeima has simply rejected this idea several times. Latvia also currently has the highest excise duty (AN) rates compared to Poland, Lithuania and Estonia.
A recent "BDO" study shows that various measures have been taken in Poland to curb the increase in energy prices. Excise duty on gasoline, diesel fuel and electricity was reduced to the EU minimum level, and a temporary exemption from AN for household electricity was also introduced.
To reduce fuel prices even further, the VAT on fuel was reduced from 23% to 8%, this will give Polish citizens significant savings on fuel bills.
Another benefit for the people of Poland is that the VAT rate for natural gas was reduced to 0%, so Polish households will be affected by a smaller price increase than families in most EU countries. A 0% VAT rate has also been imposed on basic food products and a reduced 5% VAT rate on electricity.
Comparing the actions of the Baltic states, we concluded that Estonia stands out the most, where the excise tax on natural gas and electricity was significantly reduced and a draft law on reducing VAT was considered, while in Latvia, the application of benefits to citizens was more thought out.
Already at the end of 2021, Estonia decided to expand the energy price subsidy for low-income families, extending it to households whose income per main earner is less than 1,126 euros per month.
On January 25, 2022, the Estonian government approved the price cap for electricity (0.12 EUR/KWh) and gas (65 EUR/MWh) for households and the cancellation of the electricity distribution fee for companies (previously it was only halved) in order to mitigate the increase in energy prices negative impact. These reliefs were valid from January to March 2022.
In Estonia, AN for electricity and natural gas has been significantly reduced. For natural gas, the AN rate has been reduced to the level of 2017. However, the most significant AN reduction is in the electricity consumption sector, where the AN rate has been reduced 4.5 times since May 1 - from 4.47 euros to 1 euro per megawatt hour, which is the minimum rate allowed by the EU. For consumers, this means a reduction in electricity prices by approximately 3.1%. An excise tax discount of EUR 0.5 per megawatt-hour is provided for large electricity consumers.
Jānis Taukačs, a sworn lawyer, has recently said that there is an urgent need to change the practice of the State Revenue Service (SRS), settling more than arguing with companies. At the moment, it just seems that the SRS is ready to go over dead bodies with dubious legal constructions just to get the money back. Do you agree with what he said?
I would probably not be so pessimistic, because I have noticed a change in the attitude of the SRS, I have come across a very pleasant service culture, which is drastically different from what it was five years ago. The principle "advise first" is implemented in everyday communication.
I assume that Jānis Taukačs has in mind situations where the tax has been paid and it is practically impossible or very difficult to recover it. We see that the main operating principle of the SRS is to speed up tax collection and increase the number of cases where taxes are applied, and to slow down the application of tax refunds, reliefs and exemptions.
But there are also opposite situations, where the state could earn revenue, but does not use it, for example, the capital tax in our country is lower than the taxes on entrepreneurs or workers. So it turns out that we value speculative transactions more than long-term business? It is more a matter of politics.
But in general, I am not negative about the SRS, except for one thing - it would be good if they worked more on the practice of settlements, trying to reach an agreement outside the court, as is currently being successfully done in Lithuania. Our businessmen who work there speak highly of how disputes are resolved there and how many positive solutions can be reached outside of court. This significantly saves both state and business resources.
Obviously, it's not easy, but how do you advise entrepreneurs to live in this time so that they can achieve their goals?
I don't know a single entrepreneur who doesn't reach their goals because taxes get in the way. No one claims that he had a dream to start his own business, but he changed his mind because he understood what taxes he had to pay. No! Entrepreneurs, by their very nature, like to take risks, so the issue of taxes is only secondary. Of course, entrepreneurs would appreciate and the state would gain more if taxes were simpler, more transparent and more consistent. I'm glad that entrepreneurs are passionate about their ideas, so I hope that situations where someone has filled out the declaration, but wrote in the third line what should have been written in the fifth, will not spoil this passion. I believe that both parties would benefit if tax consultants did not have to be involved in the payment of taxes and the administrative process took as little time as possible. Entrepreneurs bring most of the money to the state treasury, so they would expect more respect and hospitality from the state.
I have noticed that outside of your daily profession, you support the creation of art. Why is this important to you?
It's not just a story about art. I once lived in America for three years, where I saw how people themselves take responsibility for the environment in which they want to live. Unlike Europe, they don't take care of the cultural field there, it's done by the people themselves, supporting what they like. That's what I do too, I want to create an environment around me that I like.
And what do you like? What art makes ants run over the body?
I support various art trends, but my support is more for contemporary art, young artists, because I think it's a way to make people think. We discuss, analyze and think too little, we are too little interested. We have an artists' residence in Pāvilost, where artists live and work. This summer, we organized three exhibitions in the exhibition gallery of the residence, each of them helped bring up a topic important to society. Sometimes it's easier to speak in the language of art, it's the only environment where I see opportunities to talk about what's important. Art makes me think.
But do you also get excitement in your daily work?
I've been in this business for 20 years, so there's a reason for that. The work of a lawyer is difficult, with high stress, because there is constant contact with people and their problems. However, a solved problem is always satisfying.