Latvian businesses pay taxes and scream

Mar 15, 2001
Ilze Arklina

"State revenue tells about the business environment in the country and outlines the strong and the weak sides of the economy," Sonciks said. "Latvia is no exception."

Taxes paid by state enterprises account for about 11 percent of the combined payments by the country's 50 largest taxpayers. It corresponds to the proportions of the state and private sectors in the Latvian economy, Sonciks noted.

Gasoline traders, and alcohol producers and retailers account for 26 percent and 21 percent, respectively, of the 50 largest taxpayers' input. If the economic situation in Latvia gets worse, people will reduce their consumption of excised goods like booze and tobacco, so dependence on domestic consumption makes the budget revenues most vulnerable to economic fluctuations, Sonciks noted.

"The state revenue would feel much safer if the income came from, let's say, the export of technologies," Sonciks noted.

The amount of taxes collected in Riga and other Latvian cities illustrates the unsustainable development in Latvia's regions. Riga accounts for 77.2 percent of the taxes paid into the state budget and 64.3 percent paid into the municipal budgets. Also, 60 percent of the state social insurance payments are collected in Riga.

Last year the State Revenue Service collected 1.36 billion lats ($2.2 billion) in taxes and other fees, a 5.16 percent increase since 1999. From that, the 50 largest taxpayers account for 295.28 million lats or 21 percent.

The Latvijas Balzams distillery was the largest taxpayer in 2000, while fuel distributor Kurzemes Degviela was second. Latvijas Mobilais Telefons came in third.

The state-owned electricity utility Latvenergo was the largest value-added tax (VAT) payer, Lattelekom was second, and Latvijas Gaze finished third.

Latvijas Balzams also took first place in excise tax paid in 2000. Kurzemes Degviela was second, followed by the fuel distributor Latvija Statoil.

Latvijas Mobilais Telefons paid the largest amount in corporate income tax in 2000, followed by Latvijas Gaze and Latvenergo.

The state railway company Latvijas Dzelzcels led in social insurance contributions last year, followed by Latvenergo and Lattelekom.

Sonciks admitted that there are no problems in collecting VAT and excise tax, but difficulties occur when the state "gets in touch with the skillful optimization of profits."

Revenue from corporate income tax last year fell 20 percent compared to 1999.

However, the shadow economy is not the only reason for the decrease, Sonciks noted. Latvia's law on income tax is specific - corporate income tax is calculated six to eight months after the fiscal year and before that companies pay in advance according to previous results.

So if there is a bad year, like last year, the state has to return to the companies millions of lats pre-paid in advance, Sonciks told The Baltic Times.

"The year 2000 makes us think that the law has to be improved," he said.

Estonia abandoned corporate income tax from the beginning of last year, while Lithuania plans to do away with it next year (see related story, page 13.)

"We are considering it as well," Sonciks noted. "However, the 12.5 percent this tax accounts for in the state budget (see chart) is a lot money. If we do not collect it, we have to think about how to fill the gap."

"Every lat and santims comes in very hard."

In 1999, the shadow economy in Latvia accounted for 42 percent of the GDP, according to research by the Latvian Ministry of Finance. Sonciks said that his service is also working with offshore zones and foreign countries to track down missing tax money.

"The largest levy we have put forward is 13 million lats," he said.

Tax collection follows economic growth. In the first nine months of 2000, GDP increased by 5.4 percent while state income from taxes has increased 5.2 percent.

Latvian tax and customs legislation is based on voluntary settlement of liabilities, so the revenue service is not designed to control everything, Sonciks noted.

"I think that it is impossible to pay all the taxes," he said.

The revenue service plans to launch a pilot project to use particular companies to prove his statement. "Some companies have already agreed," Sonciks said.

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