Lenders' ire tested with tax bill

RIGA - As European leaders gathered in Brussels on March 25 the Latvian parliament provided a reminder of the political challenges Greece could face if it turns to the International Monetary Fund (IMF) for help, claims the Financial Times. Latvian lawmakers passed a bill on its final reading, on the day of the leaders’ gathering, to cut value-added taxes for hotels in a move that threatens to undermine the crisis-hit country’s 7.5 billion euro rescue package led by the IMF and European Union.
The parliament’s vote, which defied an agreement with lenders not to cut taxes, came as Latvia’s coalition government struggles to maintain power in the face of growing opposition to the austerity measures imposed as a condition of IMF support, reports news agency LETA.

Latvia has been hailed as a role model for Greece after pushing through tough reforms aimed at cutting its budget deficit from 12 percent of GDP to 3 per cent by 2012. But rising political turbulence in Riga highlights the difficulties for any democratic government trying to win backing for the spending cuts and tax increases typically involved in an IMF bail-out, and balancing competing pressures from the IMF and the EU.

Latvia’s largest party, the People’s Party, broke away from the ruling coalition because of its support for the tax cuts. The government has avoided collapse despite the turmoil.
The IMF and EU have kept funds flowing to Latvia but Prime Minister Valdis Dombrovskis (New Era) has warned the country against testing lenders’ patience, pointing to the example of Ukraine, whose IMF program was suspended after the government broke spending promises.

The value-added tax rate for tourist accommodation will be reduced from 21 percent to 10 percent from May 1, according to amendments to the Law on Value-Added Tax. Saeima also decided that the reduced VAT rate of 10 percent would be applied to books and the print media until 2012. The parliament, however, voted down a proposal to reduce the VAT rate to 10 percent for cafes and restaurants, as well as a proposal to introduce a 5 percent VAT rate for prescription drugs.