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Latvian gov't strikes tax reform deal

Xinhua, May 9, 2017 Adjust font size:

Latvia's tripartite coalition government reached an agreement on a sweeping tax reform Tuesday, accepting demands that were set by center-right Unity party, although debates will continue on some of the tax-related issues, local media reported.

Ministers succeeded in clinching the tax reform deal at Tuesday's cabinet sitting as they passed the tax policy guidelines 2018-2020, which had been drafted by the Finance Ministry.

They also agreed in principle to seek a solution that would provide a sustainable source of financing for Latvia's struggling health sector and to keep an eye on the budget deficit, which is expected to widen as a result of some of the tax incentives.

Unity's requirement to provide a sustainable healthcare funding plan turned out to be the main stumbling block delaying the adoption of the tax reform, which originally was scheduled for the end of April.

Latvian Prime Minister Maris Kucinskis said after the government meeting that a special workgroup would be formed to find a funding source by June 30. The goal is to increase the national health budget to 4 percent of GDP by 2020.

A representative of the Latvian Fiscal Discipline Council warned, however, that the tax measures proposed by the Finance Ministry will be costly and ineffective as a tool intended to reduce income inequality. Moreover, the tax reform will be quite risky because Latvia has not put aside a fiscal "safety cushion."

Despite these objections, the Council agreed that the tax reform was necessary.

The proposed tax reforms are expected to affect both employees and employers. The measures planned as part of the reform provide for easing the tax burden on labor, although the tax rate on high salaries will remain unchanged.

Reinvested profit will be exempt from taxation, and the minimum wage and untaxable minimum income will be increased. Compensatory measures are also being planned to balance the national budget and keep the budget deficit from growing uncontrollably.

Discussions about tax increases cannot be ruled out but the main goals of the tax reform will stand, Kucinskis told journalists when asked if calls for tax hikes might follow Latvia's upcoming local elections this summer.

"Discussions are possible, but we must not lose our main goals. There will be no backing down from the commitment to a zero tax on reinvested profit and reducing inequality," said the prime minister. Endit