Political Risk Analysis - Tax And Labour Market Reforms A Mixed Bag - OCT 2017

BMI View: The Latvian parliament passed sweeping tax reforms on August 4, with the measures set to come into effect on January 1, 2018. The proposals see a shift from direct taxation of income onto consumption, and an attempt to incentivise business investment, which should be supportive of Latvia ' s economic competitiveness. However, the ongoing rise in the national minimum wage poses a risk.

The Latvian parliament passed sweeping tax reform on August 4 (see 'Tax Reform On Deck', May 5), which include a reduction in income tax that should help to support Latvia's economic competitiveness. Beginning in 2018, a progressive system of personal income taxation will be introduced to replace the existing 23% flat tax on employment and business income. Income up to EUR20,000 will be taxed at 20%; income between EUR20,000 and EUR55,000 will be taxed 23%; and income in excess of EUR55,000 will be taxed at 31.4%. Income from capital gains will be taxed at 20%, instead of 10 or 15% as is currently the case.

This higher rate has attracted criticism as a result of the perceived disincentivising effects on labour and the risk that it could make Latvia less attractive to would be foreign investors in high value industries. Some of the proceeds from the so-called 'solidarity tax' will be hypothecated to healthcare expenditure as the government seeks to make progress toward its goal of seeing 4% of GDP spent on healthcare.

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