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IMF Urges Latvia To Reconsider Tax Plans

By Ulrika Lomas, Tax-News.com, Brussels

30 November 2012


The International Monetary Fund (IMF) has urged Latvia to reconsider its tax policies, criticizing in particular plans to cut personal income tax.

Personal income tax is set to fall by 5% between 2013 and 2015 and the IMF advises that the tax plan "should be reconsidered, at least for 2014 and beyond: better options could include a two-tier system or an increase in the minimum non-taxable allowance."

Latvia's personal income tax rate is currently 25%, and is due to fall to 20% by January 1, 2015.

The IMF's assessment follows a mission to the country, and it suggests "strengthened property taxation, the elimination of some wasteful subsidies, and more careful targeting of social insurance and tax exemptions" to offset economic headwinds.

While the IMF observed that Latvia’s labor market demonstrated "remarkable flexibility" during the crisis, it said that there remains scope to promote work incentives.

"Several fiscal reforms should be considered from this perspective," the Fund said. "The guaranteed minimum income (GMI) benefit—which currently phases out one-for-one with income—places a very high tax wedge for GMI recipients entering employment. Consideration should be given to reducing the benefit more gradually with rising income levels. Separately, a shift towards in-work tax credits and benefits could be considered as these have proven to be effective in increasing employment of lower skilled workers."

TAGS: tax | property tax | International Monetary Fund (IMF) | Latvia | tax rates | individual income tax

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