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IMF Backs Retention Of Latvian Flat Tax Rate

by Tatiana Smolenska, Tax-News.com, Moscow

12 May 2014


The International Monetary Fund (IMF) has again discouraged authorities in Latvia from cutting the flat rate of personal income tax.

The recommendation was included in an official statement issued by the Fund upon the conclusion of its 2014 Article IV consultation with Latvia. It echoes similar recommendations issued by the Fund in 2012 and 2013 that Latvia should instead adjust tax thresholds.

The government made plans in 2012 to incrementally reduce personal income tax from 25 percent to 20 percent by 2015. However, the scheduled reductions were delayed, in line with IMF advice, and replaced instead by a one percentage point reduction in social security contributions. The personal income tax rate was cut to 24 percent in 2013.

In its 2014 Article IV consultation report, the IMF recommended that Latvia improve its administration of taxes and look to broaden the tax base by increasing property taxes. It noted that improved tax administration processes yielded substantial revenue gains last year.

Broader labor market reforms are also needed to improve work incentives, the IMF said. In this regard, there is merit in adopting a more gradual phasing-out of the guaranteed minimum income (GMI) benefit to reduce the tax wedge for GMI recipients entering employment, it said.

The Fund said it supports the broad contours of the 2014 budget, stating that it will support continued fiscal consolidation at a measured pace while strengthening the social safety net.

TAGS: tax | property tax | budget | International Monetary Fund (IMF) | Latvia | tax thresholds | social security | individual income tax

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