Experts: tax reform could block billions in investments

  • 2005-06-01
  • By Milda Seputyte
VILNIUS - After nearly half a year of deliberations over tax reform, swinging from an interim increase of profit tax to an introduction of a turnover tax, the government finally decided to compensate budget shortcomings with an interim tariff on profits.

But the damage has already been done. Not only has the Cabinet's indecisiveness enraged taxpayers, but it has also threatened the stability of the ruling coalition. Former Finance Minister Algirdas Butkevicius withdrew from the Cabinet in protest of the political council's fickle behavior. And the minister isn't the only one who regards the projected turnover tax as a possible violation to EU law.

Although the political council of the ruling coalition finally dropped the idea to tax turnover and to introduce the so-called social tax 's an interim tariff on profits 's experts give little credit to the proposal, which could cost the country billions of litas in foreign investments. Nevertheless, the tax plan is working its way through the Seimas (Lithuania's parliament).

If the social tax goes into effect after Parliament's vote, the profit tax, which is now 15 percent, will be boosted in 2006 by an additional 4 percent. In 2007 it will be boosted by another 3 percent. Then, beginning in 2008, the social tax will be canceled, bringing the profit taxation back to its current rate of 15 percent.

The ruling coalition claims that funds from the social tax 's which in actuality come from the boosted profit tax 's would be allocated to tackling unemployment problems, financing effective social insurance and other types of social policy.

Meanwhile, experts with the international media group "the Economist" resolved that foreign investors might choose to relocate their businesses to other neighboring states such as Estonia, for instance.

The magazine Business Eastern Europe forecasted that, due to the interim profit tax, some 363 million euros of profits generated in Lithuania may be sent abroad. Experts implied that the new profit tax amendment, which was recently passed in Parliament, creates a better environment for business. The profit tax in Estonia is 15 percent at the moment, while reinvested profits are free of tax.

President Valdas Adamkus expressed criticism that the government might not have considered all possible alternatives of the tax reform. But in an interview with the Ziniu radijas station, Brazauskas retorted: "The president perhaps is not aware of the whole thing, because thousands of alternatives were considered."

The prime minister expressed little concern over the probability that investments would shrink. On the contrary, he demonstrated a firm belief that businessmen wouldn't rush to hide their profits because of the boosted profit tax.

As Brazauskas put it, "The social thoughtfulness of the entrepreneurs is amplifying." Businessmen believe the money won't go into Brazauskas' hands, but into the hands of doctors, teachers and other social groups instead, he added.

Taking into consideration the possible harm the social tax could have on economic growth, the opposition suggested to postpone the introduction of the new tax until 2007, and to reduce the tariff to 1 percent. Other suggestions include that the new law should not be applied to businesses of small and average scale. However, none of this has seemed to reach the ears of the ruling coalition, which accumulated enough votes in Parliament to approve every project related to tax law amendments.

Liberal Centrist MP Gintaras Steponavicius said that the ruling majority, instead of reinforcing the fight against smuggling and reducing state administration costs, had taken the easiest path to patch the budget holes: it devised a new tax. By contrast, he suggested balancing the budget with privatization money.