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IMF Urges Latvia To Make Tax System More Equitable

by Ulrika Lomas,, Brussels

20 June 2016

The International Monetary Fund has called for reform of Latvia's tax regime to support lower income taxpayers.

The Fund said in its 2016 Article IV consultation report for the country that the large tax wedge in Latvia discourages work and imposes a significant burden on lower income households. Meanwhile the corporate income tax rate is among the lowest in the EU, and tax exemptions and non-compliance are extensive. At the same time, income inequality in Latvia is among the highest in the EU, while revenues and expenditure are among the lowest, it said.

The report said that Latvia should shift the tax burden towards growth-friendly taxes, including property taxation, which currently accounts for about 0.8 percent of gross domestic product (GDP) in revenue (less than half the OECD average). This should be accompanied by the implementation of the recently proposed cadastral valuation reform, with appropriate exemptions for the poorest households, it said.

The IMF also urged the authorities to reform the micro-enterprise tax regime, which it said has lent itself to considerable abuse. Options include raising the corporate income tax, a personal income tax surtax on high-income earners, reducing the minimum non-taxable threshold for pensioners, and better targeting tax allowances and expenditures, such as child benefits.

The Fund said that the country's 2016 Budget is broadly appropriate. Increases in defense and social spending of about 0.5 percent are offset by revenue-enhancing measures, including the introduction of a solidarity tax on high-income earners, increases in excises duties, and measures to broaden the tax base and improve tax compliance, as well as lower current expenditures.

In addition, it said that the authorities' ambitious plan to bring tax revenue up to a third of GDP by 2020 is commendable, and will require sustained efforts to improve tax collection and policy.

TAGS: compliance | tax | economics | tax compliance | property tax | tax incentives | fiscal policy | gross domestic product (GDP) | budget | International Monetary Fund (IMF) | corporation tax | Latvia | tax breaks | individual income tax

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