Evaluations of the natural resources tax, VAT, and other tax regimes have been prepared

Based on the opinions and proposals expressed at the meetings of the Tax Policy Improvement Coordination Group, an assessment of the current situation with the natural resources tax and climate taxes has been developed, along with potential proposals for further action. An assessment of the current situation of small tax regimes has also been prepared, providing data-driven insights into the application of these regimes in Latvia and the influencing factors, as well as an evaluation of the current situation of value-added tax (VAT) with suggestions for further discussion.

The evaluation of the natural resources tax and climate taxes includes key indicators such as tax revenues, their share in the gross domestic product (GDP), tax exemptions, and a discussion on the future climate tax policy. Both tax rates and revenues have been compared among the Baltic States. In addition to their goals of limiting environmentally and climate-damaging activities, globally, natural resources and climate taxes are also viewed as financial resources to support a growth-promoting tax structure and appropriate government expenditures.

Given that Latvia must start the second phase of the Emission Trading System (ETS 2) from 2027, an evaluation was conducted on how to implement a gradual transition to expanding the ETS system. The evaluation includes information on the potential positive impact of the discussed proposals on the state budget, which would facilitate state support in matters related to environmental improvement.

The assessment of small tax regimes analyzes the possibilities of their application in Latvia and the factors influencing the choice of such regimes. It provides an overview of the number of taxpayers using one of the currently available small regimes, the total amount of revenue, and the current challenges. The material analyzes different forms of economic activity, their provided opportunities, and possible necessary solutions to address deficiencies. The importance of social insurance in the context of economic activity and the attraction of labor for short-term jobs is also examined.

Although the overall contribution of these regimes to tax revenues is small, they affect a significant number of Latvian residents. Interaction with one of the small tax regimes shapes the attitude of economic operators towards tax payment, understanding of equal competition conditions in the business segment, and perception of social security through the linkage of social contributions with received services and the general sense of whether the tax system is fair to those in similar conditions. In the context of the shadow economy, individuals working in one of these regimes are regularly mentioned as being in a high-risk area.

The main dilemma of small regimes is between the desire to simplify as much as possible the administrative and tax burden for small and/or irregular business operators with limited administrative resources. Thus, the tax aspects should not encourage participation in the shadow economy and should prevent the possibility of using these regimes to avoid tax payments or significantly reduce the amount of regularly paid taxes.

The VAT assessment compares Latvia with European Union member states. Both standard and reduced VAT rates are compared among countries. Indicators such as VAT revenues and their influencing factors, state foregone revenues resulting from the application of reduced rates and exemptions, and the VAT gap are evaluated. Analyzing VAT revenues in Latvia, it is concluded that they are increasing in absolute terms and as a share of GDP. In 2023, VAT revenues amounted to 9.6% of GDP, which is 0.3 percentage points higher than in 2022. Comparing Latvia's VAT revenue share of GDP with other EU member states, in 2022 it ranks 4th, surpassing Lithuania and Estonia and exceeding the EU-27 average of 7.5%.

The data collected in this evaluation indicate that the VAT system in Latvia works well overall and VAT is currently one of the most important sources of state revenue. Compared to the other Baltic States, reduced rates in Latvia are already applied to a wide range of goods and services. The existing VAT rate structure (reduced rates and their targeting) generally ensures that the share of VAT expenses in households with the lowest incomes is moderate compared to other EU member states. The evaluation includes information on the potential impact of the discussed proposals on the state budget, which would facilitate state support in meeting residents' expenditure needs.

During the development of proposals, discussions were held with social and cooperation partners, including the Employers' Confederation of Latvia, the Free Trade Union Confederation of Latvia, the Latvian Chamber of Commerce and Industry, the Foreign Investors' Council in Latvia, and others.

The assessments can be found in the section "Materials for the development of national tax policy guidelines" on the website of the Ministry of Finance.

For comments and proposals, please write to the email [email protected] by June 27.

Information from the Ministry of Finance of the Republic of Latvia

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