Labor taxes too high, say foreign investors

RIGA - The income tax rate in Latvia should be reduced to 20 percent to boost competitiveness, and compensated by a property tax of 2.5 percent, according to a report by the business daily Dienas Bizness on the proposals made by the Foreign Investors Council (FICIL) during a meeting with the Latvian government. “One significant factor that would allow the attraction of foreign investment to Latvia and increase the competitiveness of the local labor market would be to reduce the rate of income tax,” stressed Zlata Elksnina-Zascirinska, director of the council’s tax issues group and partner in the auditing firm PricewaterhouseCoopers.

“According to research by the World Bank and other international institutions, the current labor tax constitutes 82 percent of companies’ total tax payments, which not only holds up economic development, but also stimulates the growth of the shadow economy,” noted the tax expert.

In Elksnina-Zascirinska’s view, the situation could be changed by shifting the tax burden from income tax to property tax, which is not only easier to administer, but also brings greater income, irrespective of economic fluctuations in the country, as payers of the tax are both residents and non-residents, and both legal persons and private individuals.
Finnish telecoms giant Nokia’s president and former prime minister of Finland Esko Aho emphasized at a press conference following the meeting that one of the tasks the government should be working on to overcome the economic crisis is the development of measures for stimulating the economy.

Aho pointed out that any country currently affected by the financial crisis can follow the example set by Finland, when the country was hit by a crisis in 1990. At that time, Finland concentrated on three things - financial and banking stimulation, balancing of state budget spending, and the development of programs for stimulating the economy.
He believes that Latvia will be able to move forward if it invests in these three areas, adding that the most important thing for Latvia is to work on policies to create economic growth. The Nokia president also indicated that it is essential not to “eat the seed potatoes” during a crisis, meaning that spending should not be reduced on those areas which will bring growth, mentioning education, research, science and innovation as several such areas.

During the meeting, the Foreign Investors’ Council also presented the government with its view on taxation matters, revealing a package of measures designed to create a transparent and stable taxation system, an increase of transparency in public sector spending, stricter principles for tax collection, and indicating the necessity of clearly explaining new taxation policies to the public and giving notice of any changes well in advance.
Prime Minister Valdis Dombrovskis (New Era) stressed that discussions were already underway over the possibility of shifting the burden of taxation from labor and employment to consumers and real estate.

Annual high-level meetings between the government and FICIL have been taking place since 1999, with the aim of improving the business environment in the country and fostering foreign investment.