Lithuanians struggle with tax reform

  • 1998-09-24
  • Parker Ruis
VILNIUS - Taxes don't get good press anywhere. American taxpayers have long regarded their convoluted, confusing system with scorn. One German economist appearing recently on CNN described his country's system as "organized chaos."

After half a decade without having to deal with taxes, Lithuanian businessmen are catching on. Complaints and suggestions for improvement are becoming more frequent and better organized.

An organization called the National Businessmen Confederation (NBC) recently attempted to solicit support from all political factions for its ideas on reducing bureaucratic obstacles by amending tax laws for businesses.

When asked what exact changes the organization hopes to make, a member, Juozas Sarkus, said it would be difficult to answer such a broad question considering the number of reforms that are needed. One area where reforms are absolutely necessary, he admits, is tax administration.

"Now the laws are very flexible," said Sarkus. "Tax inspection requires so many different papers that it is difficult to see it all in the correct way. We have, as a result, many penalties due to a wrong view point.

In our opinion, a better and more democratic policy is to go through the courts. Don't give the tax inspectors any money [to pay for penalties], because if you take them to court, chances are they'd lose 80 to 90 percent of the time."

The government's press service, however, holds that the NBC's president, Viktoras Uspaskich, is becoming more enthusiastic about reforms simply because he received penalties amounting to nearly 6 million litas ($1.5 million) for breaking the tax law and committing fraud by not registering all sales in his company's cash registers.

"His radical requirements, which recently appeared in the press, do not defend the interests of businessmen, but are used as a way to influence the courts and governing institutions on the eve of the criminal case brought against Uspaskich's company, Andaura," the press service stated.

Regardless of the motives, Uspaskich is not alone in calling for tax reform. The Lithuanian Free Market Institute (LFMI), a nonprofit organization, was one of the first places where tax reform ideas were generated.

Last year, the organization released a report that identifies their recommended set of reforms. The LFMI accuses the current Lithuanian tax system, as a whole, of "distorting the workings of the market, crippling individual motivations, fueling the shadow sector, as well as reducing and impeding the growth of real incomes."

According to the report, Lithuania's tax policy initiatives have resulted in a multi-level tax system in which value created is taxed numerous times at the various levels. The institute counted a total 18 different taxes which plague society.

In one section of the report, which deals with corporate income tax, the institute hammers away at what it refers to as "defects" of the system.

One example is the corporate income tax charged on projected profits, which results in unjustified crediting of the state by enterprises. Another, the ambiguous procedures for tax computation, which results in the circumvention of taxes, and the costly administration of corporate tax.

In the long term, the LFMI proposes to eventually repeal both income and corporate income tax and shift to a system based upon the principles of value added tax.

Ruta Vainiene of the LFMI stated that while the government is heeding the call of reform, they are not always following the institute's suggestions to the letter.

"Is the government approaching reform as we suggested? Well, yes and no," said Vainiene. "While they said they will abolish corporate taxes by the year 2000, they plan to stay with personal income tax and even increase the tax base. When a VAT was being invented, there was an argument for substituting it for direct income taxes. What arguments exist for leaving both direct and indirect taxes? More revenue for the government. This view wins every time, and we don't agree with it."

Indeed, tax reform is inescapably linked to budget reform, she says. So far, any measures which the government has taken to tinker with the budget has not led to any planned reduction of expenditures.

Another reform suggested by the LFMI and implemented only in part by the government involved a different payment system on businesses' taxes on profits. According to Rasa Vildziunaite of the tax inspectorate's office, it is the most recent change in the tax system, implemented June 30.

She said it was decided to end businesses' payment of a 29 percent tax on earned profits at the end of every three months and replace it with half-yearly payments of the same percentage, based on the profits of the previous six months. Many business people claim they are now at a disadvantage because of the change.

"It's possible that if my profits drop, I still have to pay taxes in advance based on the figures where my profits were high," said one businessman. "It is especially bad for some companies affected by the Russian crisis that are making no profit, but must pay 29 percent of their higher profit figures of the previous six months."

Vainiene said that the LFMI proposal was somewhat different to the implemented version. The tax was originally intended to be applied to planned profit.

"Firms should plan their profits and then pay a portion of it," said Vainiene. "If the sum differs significantly from actual profit at the end of the year, interest to the budget should be paid. This order is useful for all enterprises."