State pushes for last minute corporate tax, debt relief

Latvia's lame-duck government and outgoing parliament have raised eyebrows with a series of last minute decisions on corporate debt and tax relief that critics say are financially reckless and smack of cronyism.

Just weeks ahead of stepping down, the government announced this month it had canceled 1.2 million lats (2.01 million euros) of debt held by the country's two privately-owned sugar factories in Liepaja and Jelgava, both of whom ended 2001 with net profits. The debts had been outstanding since 1994, when the state issued loans to the then-struggling factories.

The Saeima, Latvia's parliament, meanwhile, looks set to follow suit on Oct. 31, when it is expected to pass a law canceling 7.6 million lats' worth of tax debts for 19 enterprises and organizations.

A week earlier, the legislature suddenly dropped a 17.5 million lats lawsuit against the Kalija Parks potassium transit company in the port city of Ventspils.

The moves come on the heels of an Oct. 5 general election in which Prime Minister Andris Berzins, his Latvia's Way party and two-thirds of the sitting lawmakers in the 100-seat Saeima were roundly defeated by newcomers promising a crackdown on corruption.

At a session Oct. 24, parliament also voted to give 67 outgoing MPs a three-month severance package at an average monthly rate of 655 lats, netting them nearly 2,000 lats apiece and draining some 134,000 lats from the budget.

"It's irresponsible and very alarming. It's exactly why people are so tired of the government elite," said Lolita Cigane, an anti-corruption specialist at the Soros Foundation's Riga office. "This is about politicians trying to secure their future."

The government has denied accusations of favoritism and says the debt and tax relief will have a negligible effect on the 2002 budget while giving a much-needed boost to local companies.

Inguna Sudraba, state secretary at the Finance Ministry, said the tax relief will cost some 3 million lats in revenues, or less than 1 percent of the 2002 budget, and will not contribute to a year-end fiscal deficit.

According to ministry figures, Latvia is performing better than expected financially; after the first nine months of the year, the fiscal deficit stood at 20 million lats. The year-end forecast called for a 140 million lats deficit, or 2.63 percent of GDP, but Finance Minister Gundars Berzins said recently the actual figure may prove to be less than 2 percent.

Among the largest winners if the tax relief scheme is passed would be Locomotive, a Daugavpils mechanical engineering company that stands to be freed from 4.26 million lats of tax debt, and Ogre knitwear company, which owes the state 1.6 million lats in back taxes. Most of the debts date back to the early 1990s, the ministry said.

"These are large companies They're important to the regions and employ a large number of people, but their debts are so big that they cannot develop," said Sudraba. "The proposal is to help them get back on their feet so they can become sound companies and pay future taxes."

Critics said the proposal sets the wrong example. Outgoing Special Tasks Minister Roberts Zile, who broke with other ministers to oppose the proposal, said it sends the message that if companies refuse to pay taxes long enough, all will be forgiven.

Zile also criticized the government's decision earlier this month to forgive the debts of the Liepaja and Jelgava sugar factories.

"These are both pretty profitable companies. They get a large amount of government protection and they will only get more once we join the European Union," he said. "Had we capitalized the debt, the government would have received valuable shares that could have been sold later on for a lot of money."

In 2001, Liepajas Cukurfabrika (Sugar Factory) recorded net profits of 1.3 million lats, while Jelgavas Cukurfabrika ended the year nearly 500,000 lats in the black, thought it did see profits drop from nearly 1 million lats in 2000.

The two companies also benefit from laws that forbid the local dessert industry and confectionery companies from using cheaper imported sugar.

Juris Jonaitis, president of the Riga-based Laima confectionery company, said a recent hike in sugar prices to 390 lats per ton is putting the squeeze on local producers.

Estonian sugar, he said, costs an average of 160 lats per ton.

"The situation damages our competitiveness," he said in a statement.

But Peteris Elferts, an adviser to the prime minister, said the laws were instituted when Latvian sugar producers were struggling first with early market reforms and later with the effects of the 1998 Russian crisis.

"None of the debts being written off now are new debts," he said. "They're old debts that have been dragging the companies down for a number of years."