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IMF Scopes Out New Revenue Sources In Lithuania

by Ulrika Lomas, Tax-News.com, Brussels

12 May 2014


The International Monetary Fund has said that there is scope to improve the taxation of wealth and capital in Lithuania, and to cut value-added tax rates by improving its coverage and administration.

Following its 2014 Article IV consultation with the Baltic country, the IMF released a report in which it pointed out that Lithuania's revenue from taxing capital and wealth is only one quarter of the euro area average and one half of the Central and Eastern Europe (CEE) average. At about 26 percent of GDP in 2011, Lithuania's overall tax take is also the lowest in the European Union.

The Fund proposed broadening the residential property tax base by lowering the tax-free threshold, which currently stands at LTL1m (about USD400,000). In addition, it recommended that Lithuania adopt an annual motor vehicle tax, based on engine capacity (or by weight) in line with international best practice, while strengthening inheritance and gift taxation.

The Lithuanian government could increase its revenue from consumption taxes, especially through improvements to tax administration, the IMF said. Overall consumption tax collection is comparable to elsewhere in the European Union (EU), but this reflects relatively high rates, the report pointed out. Nonetheless, the tax yield given these rates remains comparatively poor. Measures to improve value-added tax compliance are needed, and authorities should also take action against a loss of excise tax revenue through smuggling and cross-border shopping, it continued, recommending an increase also in excise duties on fuels.

The authorities could also boost revenue from corporate income tax, which currently only accounts for 0.8 percent of gross domestic product (GDP), by addressing exemptions and loopholes in tax legislation. The report recommended withdrawing the preferential rate for small companies, and called for the removal of the six-year tax relief in free economic zones in favor of less generous preferential conditions. On personal income tax, the IMF suggested that the government should subject all pension payments to income tax.

In addition, it said that the exemption from capital gains tax on housing should be restricted to primary residences, and short-term gains on financial assets should be subject to a 15 percent withholding tax.

The IMF estimates that the proposals contained in its report would result in revenue gains equivalent to between 3.1 and 3.4 percent of gross domestic product (GDP) annually in the short term, and between 3.6 and 4.1 percent of GDP in the medium term.

TAGS: capital gains tax (CGT) | compliance | Central and Eastern Europe | VAT rates | tax | value added tax (VAT) | tax compliance | property tax | vehicle tax | gross domestic product (GDP) | International Monetary Fund (IMF) | legislation | tax rates | withholding tax | gift tax | European Union (EU) | Lithuania | Europe

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