Latvia's resources and taxes are flowing across borders

  • 2024-05-20
  • Kristine Stalidzane

As the borders of EU countries are open and people can cross them freely, they often do. Very frequently, this is because they are tempted to cross because of prices. After all, they are tempted by the fact that this or that product is cheaper in the following country. For example, Danes often shop in Germany, where products are more affordable; the Swiss do the same in France and Germany. Latvia's border towns of Valka and Ainaži have become a shopping mecca for Estonian consumers.  

But there are cases where people cross the border not to buy but to sell. This situation has prevailed for a long time in the scrap metal market, which is a valuable secondary raw material that is only increasing in value under the Green Deal. It would be beneficial for both the Latvian State and Latvian entrepreneurs if local scrap metal stayed here in Latvia, but unfortunately, in many cases, this is not the case, and it goes across the border. Why? 

The Personal Income Tax (PIT) law determines how scrap metal is taxed in Latvia. In Latvia, income from the sale of scrap metal is subject to personal income tax - if a resident transfers black or non-ferrous scrap metal, the personal income tax rate is 10%, and the scrap buyer pays this amount to the state. The problem is, however, that the tax legislation is different in our two neighboring countries. In Lithuania, the personal income tax rate on scrap metal is only 5%, while in Estonia, it is nonexistent. As a result, many Latvians, especially border residents, choose to go across the border with their scrap metal and hand it over there. The legislation allows this. The only problem is that when people choose a perfectly legal way of transferring scrap metal, the Latvian state and Latvian entrepreneurs lose out because of the loss of taxes, business volume, and profits.

The different tax rates for scrap metal transfers in neighboring countries have developed historically. In Latvia, a higher rate was introduced during the Global Financial Crisis to supplement the state budget - this is when the 10% rate for scrap metal was introduced. In comparison, Lithuania introduced a 5% rate. In Poland and Estonia, the rate is 0%. As a result, scrap metal in Lithuania puts 5% more money in people's wallets, while in Estonia, it puts 10% more.

Moreover, such differences in tax rates have contributed to the development of the shadow economy, whereby brokers operate in the market, buying scrap metal from citizens without paying any tax, transporting it across the border, and handing it over at reception points. This is also reflected in the data: while in Estonia, 78% of all black scrap and 41% of non-ferrous scrap is bought from natural persons, in Latvia, the figures are only 44% and 36%, respectively. The only possible explanation for this difference in data is that some scrap in Latvia is sold to illegal buyers. Moreover, non-ferrous scrap loses the most - it has a significantly higher price and significantly smaller volumes and is, therefore, easier to transport than ferrous scrap. In addition, sorting non-ferrous scrap in inappropriate conditions poses a particular environmental threat, and this area should be regulated most. 

The differences in data and figures between countries show that control and anti-shadow economy measures alone cannot tackle illegal scrap metal procurement. As the most significant volume of scrap metal from Latvia flows directly to Lithuania, a logical step in terms of resource conservation and tax increases would be to bring Latvia's scrap tax rate in line with Lithuania's 5% rate. After all, the global financial crisis ended fifteen years ago, and it is time to review and critically evaluate the decisions taken at that time and their consequences. According to the Latvian Association of Waste Management Companies, the positive effect on the turnover of scrap metal collection companies from the alignment of tax rates with Lithuania will be EUR 23 million per year. In contrast, the tax revenues of the state budget, after a temporary initial drop, could increase by EUR 2.5 million in the third year compared to the current level.