Inflation is avoided by reducing tax rates and raising wages

The Baltic states, the Netherlands, France and Germany are raising minimum wages, Austria, France and Spain are reducing corporate income tax rates, while Spain is introducing a temporary tax on banks and energy companies. This is shown by the BDO study on the tax changes of Latvia, Estonia, Lithuania, Germany, Austria, France, Spain, Sweden, Finland and the Netherlands, which came into force in 2023, and the national support and relief systems for citizens and companies.

"All changes can be classified into two big groups: good and bad news for taxpayers - both entrepreneurs and high and low wage earners," Jānis Zelmenis, partner of AS BDO Latvia, describes the general direction of tax changes.

In order to maintain the competitiveness of their national companies and the purchasing power of their citizens, many European Union countries in 2023 will maintain reduced excise tax rates for energy resources, value added tax rates will also be cut, and they will provide support to low-income recipients. "In several countries, from 2023, the minimum that is not subject to personal income tax has been increased and personal income tax rates have been reduced, or the threshold from which the established rate of this tax is applied," says J. Zelmenis. He points out that it was the Baltic states that were the leaders in the growth of inflation in the entire European Union, however, unlike other bloc countries, the benefits and support system was considered the best medicine, while elsewhere, without such a solution, the reduction of value added tax rates was also implemented.

The Baltic Way

The BDO study shows that in the Baltic States - Latvia, Estonia and Lithuania - the minimum wage has been significantly increased from January 1, 2023. "In Latvia, the minimum wage was increased by 120 euros or 24% from 500 euros per month to 620 euros, while in Lithuania it increased by 110 euros from 730 euros to 840 euros per month, and in Estonia - by 71 euros from 654 euros to 725 euros per month, thus the highest the minimum wage in the Baltics is in the southern neighboring country," says J. Zelmenis. He draws attention to the fact that the minimum not subject to personal income tax in Latvia was EUR 500 and remained at the same level, while in Estonia it increased to EUR 654 per month, while in Lithuania it increased by EUR 85 - from EUR 540 to EUR 625 per month. "Thus, Latvia has the lowest income tax-free minimum in the Baltics," says J. Zelmenis. He points out that with the increase of the minimum wage in Latvia, the minimum mandatory contribution rate of the state social insurance increased from 170.45 euros per month to 211.36 euros, in Estonia the minimum contribution of this tax is only slightly higher - 215.82 euros per month.

Lower VAT in the south

J. Zelmenis points out that from January 2023, the VAT rate for some goods and services in Lithuania was reduced to 9%. "The correction of the VAT law includes some changes in VAT rates that will be permanent, while others will be maintained only until June and December 2023 or even indefinitely," says J. Zelmenis. He points out that the reduced VAT rate of 9% for catering and takeaway services will be valid until December 31, 2023. However, this reduced rate does not apply to alcoholic beverages. "In Latvia, the introduction of a reduced VAT rate for public catering is talked about and talked about, but regardless of which political forces form the government, nothing changes, because the VAT rate is still 21%," said J. Zelmenis.

He emphasizes that the reduced VAT rate of 9% is applied to accommodation and entrance to art and cultural events until June 30, 2023. "Unlike wealthy and wealthy people, in Baltic Germany, food, excluding drinks, will continue to be subject to a reduced VAT rate of 7%, because it seems that the majority of the population there lives in poverty and therefore without the reduced VAT rate will simply starve, or at best semi-starve," the paradoxical picture shown by J. Zelmenis.

An even poorer country is Spain, where the VAT rate is from 4% on bread, milk, fruit, vegetables, eggs, etc. is reduced to 0%. "In Latvia, farmers, food processors and shopkeepers are already calling on the government to reduce the VAT rate for all food, not only fruits and vegetables, which already have a 5% VAT rate, but so far unsuccessfully, because this way the wealthy will immediately eat two meatballs instead of one," said J. Zelmenis.

French example

J. Zelmenis mentions France (annual inflation 7%) as an interesting solution for extinguishing the fire of inflation, where from January 1, 2023 the increase in gas tariffs is limited to 15%, and from February 1, 2023 - up to 15% in electricity tariffs as well An increase. This cap on rate increases applies to all households, apartment properties, social housing, small businesses and smaller municipalities. "In rich Latvia (annual inflation 21.4%), gas and electricity tariffs can be increased by as much as necessary, but in poor France, for some reason, a ceiling is set for the price increase of these energy resources. Perhaps the French government is afraid of the return of the yellow vests to the streets," said J. Zelmenis. He draws attention to the fact that in France a fuel allowance of 100 euros has been introduced for the poorest workers who use their own vehicle to go to work. Also, for children under six years of age, the ceiling limit for care expenses has been increased from 2,300 euros in 2022 to 3,500 euros this year.

Wealth tax in Spain

BDO research shows that from 2023 Spain (annual inflation 5.8%) will be subject to a new temporary tax (4.8% of net interest and commission income) on banks and energy companies. The new solidarity tax is starting to work in Spain - it will be applied to large fortunes in 2023 and 2024, and with the tax (1.7% will be applied to assets between 3 and 5 million euros; 2.1% - for assets between 5 and 10 million; 3 .5% – for assets greater than 10 million euros) will be taxed on persons whose assets exceed three million euros. "In Spain, from 2023, the new extraordinary taxes for energy companies, financial institutions and large wealth will also be collected, it already came into force in 2022, they will start to be collected in 2023, taking into account the income of 2022, while in the Baltics for some solidarity or special a surplus tax for banks is discussed both in Tallinn and Vilnius, but in none of the Baltic countries has a concrete decision been reached," concludes J. Zelmenis.

Premium without taxes

Due to high inflation (annual inflation of 9.2%), since October 26, 2022 in Germany, the legislator has allowed employers to pay their employees a tax-free inflation compensation bonus of up to 3,000 euros.

"2023. In 2018, the employer still has a whole year to pay the tax-free inflation compensation bonus to its employees, the bonus cannot exceed 3,000 euros in the period from October 26, 2022 to December 31, 2024," says J. Zelmenis.

He reminds that many companies in Latvia have decided to pay each employee an additional gross bonus of 100-150 euros this winter, but it is still subject to labor taxes, and a person actually receives about 30% less in his wallet.

"Latvian businessmen's call for a unique solution (a 100 euro bonus per month or 300-600 euro per year is not subject to personal income tax, or even such an employer's payment is completely exempt from labor taxes) for the year 2023 in order to preserve people's purchasing power and at the same time even more would not increase costs, thereby reducing competitiveness, as well as not screwing up inflation, which is already the highest in the last 30 years, has not found listening ears in its own country, but it is already working in Germany," said J. Zelmenis.

He admits that there is simply no better solution, because it is basically legally impossible to increase the salary by 100 or 200 euros from January 1 of this year and then reduce the salary by the same 100-200 euros.

Lower profit tax The BDO study concluded that Austria, France and Spain had reduced their corporate tax rate. "In Austria, the corporate income tax rate was reduced from 25% to 24%, in Spain this rate was reduced by two percentage points (from 25% to 23%) for companies whose turnover in the previous tax period is less than 1 million euros - that is, for small companies," explains J. Zelmenis. He points out that, similar to Spain, in France the corporate income tax rate has been reduced only for small companies. "An interesting French innovation is that companies whose turnover is less than or equal to 10 million euros and whose fully paid-up capital is at least 75% owned by natural persons are entitled to a corporate income tax discount (the reduced rate is 15%, the standard rate is 25%, from 2023 ., the threshold, from which the 15% rate is applied, applies to the profit share, was increased to 42,500 euros, previously it was up to 38,120 euros)," said J. Zelmenis. According to him, it is a peculiar formula of defense of small business, trying to keep it alive, because such conditions do not apply to large companies.

"The Latvian corporate income tax payment system (it is paid when dividends are paid) is much better and more efficient than the solutions of France, Spain and Austria with the reduction of the corporate income tax rate," answered J. Zelmenis when asked about the comparison of corporate income tax solutions with Latvia.

Another approach As interesting solutions, J. Zelmenis mentions the 0% VAT rate set for solar panels in the Netherlands, while in Finland passenger transport services are temporarily exempted from this tax, as well as the tax rate for the sale of electricity is reduced.

"The Finnish solution is interesting, but unexplored, where the strictness of state taxes corresponding to the reduction of municipal tax rates is implemented by changing the state income tax scale," says J. Zelmenis.

He explains that, in contrast to wealthy Latvia, poor Sweden also lowered tax rates for gasoline and diesel fuel, oil, and also increased the amount of benefits so that the population would maintain their purchasing power, and entrepreneurs - their competitiveness.

In order to preserve people's solvency and the survival of small companies in Europe, all possible solutions are used - both higher benefits and state support, as well as the reduction of tax rates not implemented in Latvia, Jānis Zelmenis, AS BDO Latvia partner.

Tax changes from 2023

Latvia

The minimum monthly salary was increased by 120 euros from 500 euros in 2022. up to 620 euros in 2023,
the minimum rate of the mandatory state social insurance contribution for the employer from 170.45 euros in 2022. per month increased to 211.36 euros in 2023,
increased excise duty rates for tobacco products, liquid used in electronic smoking devices, components for the preparation of liquid used in electronic smoking devices and tobacco substitute products,
there is no longer a 0% VAT rate for the supply of Covid-19 vaccine and Covid diagnostic medical devices, as well as for the provision of services closely related to vaccines and devices,
electricity, which is directly used to ensure the electricity production process, is exempt from the electricity tax, the exemption applies to such electricity generation stations that produce electricity and cogeneration plants that simultaneously produce both electricity and heat energy.

Estonia

The minimum monthly salary was increased by 71 euros from 654 euros in 2022. up to 725 euros in 2023,
with personal income tax, the non-taxable minimum has been increased to 654 euros per month (7,848 euros per year). If the taxpayer's annual gross income exceeds EUR 25,200 or EUR 2,100 per month, the non-taxable minimum is not applied,
the employer's minimum social tax contribution per employee is 215.82 euros per month.

Lithuania

By 2023 January, the minimum gross monthly salary in Lithuania was increased by 110 euros compared to 2022, and the non-taxable minimum became more than 85 euros. In Lithuania, around 610,000 residents receive old-age pensions, the amount of their pension was increased,
the minimum monthly salary increased by 110 euros or 15% compared to 2022. from 730 to 840 euros per month gross,
the minimum that is exempt from personal income tax from 540 euros in 2022. increased by 85 euros and reaches 625 euros per month, if the person's income does not exceed the projected average salary in the country in 2023. – 1926 euros,
old-age pensions increased by EUR 65, reaching the amount of EUR 575 for those with the required length of service, and by EUR 60 to the amount of EUR 542 for those without the required length of service,
reduced VAT rate for e-books and electronic non-periodic publications: they will be subject to 9% instead of 21% standard rates,
reduced VAT rate to 9% on accommodation and entrance to art and cultural events, except when they are exempt from VAT (rate change for an indefinite period),
until 2023 As of December 31, the VAT rate is reduced to 9% for catering and takeaway services (the reduced VAT rate is not applied to alcoholic beverages),
until 2023 As of June 30, the VAT rate has been reduced to 9% for entry to events,
the fixed part of the unemployment benefit increased by more than 25 euros and reached 195.47 euros, while the variable part depends on the previous salary.

Sweden

The energy tax on gasoline and diesel fuel was temporarily reduced, in addition, the total tax on oil was also reduced.
the non-taxable minimum and the threshold for collection of the 20% VAT rate have been increased,
the tax is reduced for people who have reached the age of 65 at the beginning of the year and continue to work,
extended temporary additional allowance for families with children,
electricity price compensation will be paid to households in southern and central Sweden.

Finland

If the resident's electricity costs in the period from 2023 from January 1 to April 30 exceeds 2000 euros, you can get a discount on the electricity fee, this is a temporary reduction due to high electricity prices,
passenger transport services are temporarily exempt from VAT. The applicable rate is 10%,
The VAT rate applicable to the sale of electricity will be reduced from 24% to 10%,
The Finnish municipal income tax rate will be reduced. 2023 the lowest percentage of the national income tax scale is 12.64 and is immediately applied to taxable income above zero euros.

Spain

Reduced VAT rate from 4% to 0% for basic food products and reduced VAT rate from 10% to 5% for pastes and oils, the VAT rate of 5% will be maintained on the electricity bill for individual electricity supplies. In addition, the temporary suspension of the tax on the value of electricity produced and the reduced tax rate of the special tax on electricity in the amount of 0.5% are extended - the minimum allowed by the EU,
a VAT rate of 5% will be applied to all components of the natural gas supply bill. This will also apply to briquettes, biomass pellets or firewood used as fuel in heating systems,
2023 The VAT rate was reduced by two percentage points for companies whose turnover in the previous tax period is less than EUR 1 million
The tax rate decreased from the general 25% to 23%,
The annual gross salary, from which personal income tax is payable, will be increased from the currently valid 14,000 euros per year to 15,000 euros per year.
This reduction increase applies to taxpayers with a gross annual salary of up to 21,000 euros,
2023 the new extraordinary taxes on energy companies, financial institutions and the super rich will also be levied. They already entered into force in 2022, but they will start to be collected in 2023. The plan of the State Treasury is that collection comes into effect in 2023, taking into account 2022. income,
the new solidarity tax for large wealth will be applied in 2023 and 2024, and the tax will be imposed on persons whose property value exceeds three million euros,
a new temporary tax is applied to banks and energy companies,
applied tax on single-use plastic packaging, it affects manufacturers and importers of single-use packaging,
tax on landfilling and incineration of waste.

Germany

Due to the rate of increase in prices, in order to reduce the tax burden on citizens, the government increased the non-taxable minimum, the minimum monthly wage was also increased by 22.2% and will continue to apply the reduced VAT rate for food,
is an increase of the minimum monthly salary by 22.2% compared to 2022, its amount is currently 1981 euros,
2023 a reduced VAT rate of 7% will continue to be applied to food, excluding beverages,
the non-taxable minimum increased and in 2023 reached 10,908 euros in 2022. instead of 10,347 euros,
2023 the highest VAT rate of 42% will be applied on annual income of 62,810 euros, 2022. this threshold was EUR 58,597,
employers have the right to pay their employees a tax-free inflation compensation bonus of up to EUR 3,000 (from October 26, 2022 to December 31, 2024),
the amount of benefits for single parents from 2023 January was increased by 252 euros and is now 4,260 euros per year, previously it was 4,008 euros,
from 2023 January child benefit increased to 250 euros per child per month.

It applies equally to every child,

if the child is studying and the parents are entitled to child benefit, the parents can claim tax relief to support their adult child who lives away from home but continues to study. 2023 the amount of the benefit increased to the amount of 1,200 euros for the 2023 calendar year.

Austria

From 2023 In July, the third level income tax rate will be reduced from 42% to 40%. For the second stage, the tax rate in 2023 is 30%,
previously, the non-taxable minimum for residents was 11,000 euros per year, but from 2023 it was increased to 11,693 euros per year,
the corporate income tax rate was reduced from 25% to 24%,
2023 benefits for residents were increased by 5.8%,
several changes were made in the field of taxation, personal income tax experienced significant changes. Family allowances and tax credits for children from 2023 will be adjusted annually for inflation.

France

The minimum monthly salary increased by 6.6% and reached 1709 euros,
the increase in gas tariffs is limited to 15%, but from 2023 February 1 - up to 15% increase in electricity tariffs. This tariff increase limit applies to all households, apartment properties, social housing, small businesses and smaller municipalities,
a fuel allowance of 100 euros will be paid to 10 million of the poorest workers who use their own vehicle to go to work,
the upper limit of the tax credit for child care expenses for a child younger than 6 years is increased to 3,500 euros, 2022. the limit was 2300 euros,
a reduced corporate income tax rate is applied to small and medium-sized enterprises whose turnover is less than or equal to 10 million euros and whose fully paid-up capital is at least 75% owned by natural persons,
the contribution of business value added is reduced by half in 2023. and then canceled in 2024. (In France, there is a business value-added contribution - CVAE. Currently, companies or persons who perform self-employed professional activities and whose annual turnover without taxes exceeds 500,000 euros are responsible for this contribution. In 2023, CVAE will be halved, and in 2024 plans to cancel it)
financial law of 2023 provides for a number of tax measures for individuals and introduces measures to help households cope with rising energy costs.

The Netherlands

The minimum monthly wage increased by 12.1% and reached 1934 euros,
the maximum personal income tax rate will remain at 49.5%. Basic rate for income up to 73,031 euros from 2023. on January 1 will be reduced from 37.07% to 36.93%,
the tax-free minimum for income from savings and investments increased from EUR 50,650 to EUR 57,000,
the supply and installation of solar panels in relation to residential real estate will be subject to a 0% VAT rate.

Source: Dienas Bizness