Lithuania Could Face Criticism As It Prepares To Repeal Tax On Corporate Income

Tatiana Smolenska, Tax-news.com, Moscow

16 March 2001

Lithuania is proposing a very radical move - the government plans to repeal corporate profit (income) tax at the beginning of 2002. Yet economists are saying that such a step is perhaps not the most effective way to stimulate economic activity.

Enterprises engaged in commercial activity, as well as non-profit organisations earning income from commercial activity, are subject to corporate profit tax. Actual production and distribution costs, as well as expenses related to sales and taxes, charges and other compulsory contributions set by other laws and governmental resolutions are deducted from gross revenues to compute taxable profit. Currently, profits tax is levied at 24 per cent, the tax on profit retained for investments is zero and the tax on producers of agricultural products or those rendering services to agriculture is levied at 10 per cent.

With the Lithuanian government seemingly keen to do away with one of its most important taxes, there is the genuine concern that repeal of the tax would be seen by the EU as a form of harmful competition. With its western neighbours currently bent on eliminating so-called "harmful tax competition", the fear is that Lithuania might be opening itself up to the kind of criticism the world's tax havens have been subjected to in recent months. Moreover, the International Monetary Fund (IMF) might have something to say about the matter too, and view Lithuania's move as flying in the face of fiscal discipline.

However, the goverment remains determined to eliminate the 24 per cent tax on profits from January 1 next year. Vitas Vasiliauskas, director of the Finance Ministry's income tax department, said: 'At the Cabinet level this has already been decided, it is part of the government's policy program.'

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