Tax bur­den com­par­i­son in Baltics: Latvia re­mains in the lead

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Al­though the mas­sive tax re­form has brought about con­sid­er­able in­no­va­tions in tax leg­is­la­tion, Latvia re­mains the coun­try with the high­est labour force tax bur­den among Baltic States, as con­cluded in a com­par­i­son per­formed by Swed­bank’s In­sti­tute for Fi­nances.

Latvia’s tax pol­icy is nei­ther em­ployer nor em­ployee friendly, as it cre­ates the high­est costs per worker among Baltic States.

What will 2018 bring tax­pay­ers in Baltics?

Swed­bank an­a­lysts say that 2018 has brought many changes to Latvia’s leg­is­la­tion. Be­cause of that, em­ploy­ers and em­ploy­ees have a lot to pon­der. In an at­tempt to re­duce so­cial in­equal­ity, min­i­mum wages have been in­creased (from EUR 380 to EUR 430), non-tax­able min­i­mum ap­pli­ca­tion and cal­cu­la­tion prin­ci­ple (from EUR 60 to EUR 115 last year and from 0 to 200 eu­ros this year). This year has also seen in­tro­duc­tion of a pro­gres­sive PIT rate (from 23% to 20%, 23% or 31.4% de­pend­ing on in­come). In ac­cor­dance with changes brought about by the re­form, ben­e­fits for de­pen­dents have been in­creased (from 175 eu­ros to 200 eu­ros), as have rates for state so­cial in­surance fees (from 10.5% to 11% for em­ploy­ees and from 23.59% to 24.09% for em­ploy­ers).

Tax changes have been no­ticed in Latvia’s neigh­bour­ing coun­tries – Lithua­nia and Es­to­nia. Com­pared with Latvia, sim­i­larly large changes have been reg­is­tered in Es­to­nia, whereas changed in Lithua­nia have been more mod­er­ate. For ex­am­ple, min­i­mal wage in Lithua­nia has been in­creased by 20 eu­ros (from 380 to 400 eu­ros), whereas in Es­to­nia the in­crease was 30 eu­ros (from 470 eu­ros to 500 eu­ros). More con­sid­er­able changes in Es­to­nia are as­so­ci­ated with a ma­jor in­crease of non-tax­able min­i­mum from 180 eu­ros to 500 eu­ros. Sim­i­larly to Latvia and Lithua­nia, it is dif­fer­en­ti­ated based on in­come. In Lithua­nia, non-tax­able min­i­mum amount has grown and its max­i­mum amount reaches 380 eu­ros a month in­stead of 310 eu­ros.

«Al­though the goal of Latvia’s tax pol­icy is re­duc­ing the tax bur­den for lower in­come re­cip­i­ents, other Baltic States are mov­ing to­wards more rapid steps. For ex­am­ple, the non-tax­able min­i­mum ap­plied in Lithua­nia is nearly twice as large as Latvia’s. The min­i­mum in Es­to­nia is two and a half times larger,» says Swed­bank In­sti­tute for Fi­nances expert Evija Kropa.

She also adds that un­like Latvia, PIT rates in neigh­bour­ing coun­tries were not changed in re­cent years, and they re­main lower than Latvia’s – 15% in Lithua­nia and 20% in Es­to­nia.

Labour force tax bur­den – the high­est for peo­ple in Latvia

Ac­cord­ing to the tax bur­den com­par­i­son with Baltic States, Latvia re­mains in the lead among Baltic States with the high­est labour tax. The only ad­van­tage Lat­vian em­ploy­ees have over their Lithua­nian neigh­bours is the sit­u­a­tion with reg­is­tered de­pen­dents. This, how­ever, is a volatile re­sult, be­cause Lithua­nia lifted the ben­e­fit for de­pen­dents in 2018. In­stead, the coun­try in­tro­duced a sep­a­rate EUR 30 ben­e­fit for ev­ery child un­der the age of 18.

«This way Lithua­nia en­sured in prin­ci­ple that fam­i­lies with rel­a­tively low in­come are pro­vided with ben­e­fits for de­pen­dents in cases when wages are be­low the en­tire ben­e­fit amount (with a wage of EUR 400 and non-tax­able min­i­mum of EUR 380, it was not pos­si­ble to use ben­e­fits for de­pen­dents worth EUR 200). From 1 March on­ward, fam­i­lies in Latvia will be given an ad­di­tional amount if they have at least 2 chil­dren un­der the age of 18. How­ever, the amount is still be­low that of Lithua­nia (EUR 10 for two chil­dren and EUR 66 for three chil­dren). In Lithua­nia, ben­e­fits for two chil­dren reach EUR 60 and for three – EUR 90,» Kropa ex­plains.

The most wel­com­ing labour force tax pol­icy in found in Es­to­nia

Al­though min­i­mal wage re­cip­i­ents in Latvia have ex­pe­ri­enced a ma­jor in­come in­crease this year – by 20% or EUR 58 ‘on hands’, when com­pared with neigh­bour­ing coun­tries, res­i­dents in Latvia still get the small­est amount of money at the end of the month. In ad­di­tion, even though min­i­mal wage in Lithua­nia is be­low that of Latvia (EUR 400, as op­posed to EUR 430), Lithua­nian res­i­dents re­ceive up to EUR 15 more on hands (EUR 361 in Lithua­nia as op­posed to EUR 346 in Latvia). This sit­u­a­tion formed be­cause of higher non-tax­able min­i­mum amount and lower PIT rate. Out of the three Baltic States, the sit­u­a­tion with low-wage re­cip­i­ents seems to be the best in Es­to­nia, where min­i­mum wage is (EUR 500) and it is not ap­plied with in­come tax. Af­ter all the so­cial pay­ments, work­ers are left with EUR 482, which is EUR 136 more than in Latvia. The expert men­tions that av­er­age in­come (EUR 1,000 be­fore taxes) of em­ploy­ees in Es­to­nia are con­sid­er­ably higher than it is in Latvia and Lithua­nia – Es­to­nia is ahead with an ad­van­tage of EUR 100 a month. This can be ex­plained with con­sid­er­ably higher non-tax­able min­i­mum.

As for higher in­come (EUR 1,500 be­fore taxes) re­cip­i­ents, Es­to­nia’s labour tax pol­icy re­mains the most wel­com­ing among all three Baltic States. The coun­try’s tax pol­icy of­fers in­come that is more than EUR 100 larger than what Latvia can pro­vide. Al­though all three Baltic States al­ready have sys­tems for dif­fer­en­ti­ated non-tax­able min­i­mum, Es­to­nia has a much higher wage thresh­old at which non-tax­able min­i­mum starts to de­crease and un­til which it is ap­plied (440 to 1,000 eu­ros in Latvia and 1,200 to 2,100 eu­ros in Es­to­nia).

Em­ploy­ees cost a lot more to em­ploy­ers in Latvia

Ac­cord­ing to Swed­bank’s labour tax bur­den com­par­i­son in Baltic States, em­ploy­ers in Latvia are not too hot about the coun­try’s tax pol­icy. On pa­per, equal in­come lev­els means a sin­gle em­ployee in Latvia costs less than he or she does in Lithua­nia and Es­to­nia. A com­par­i­son, how­ever, re­veals how much em­ploy­ers have to pay for a sin­gle em­ployee with a wage of EUR 500. The price is the high­est for Lat­vian em­ploy­ers (to­tal costs around EUR 831). Costs in Lithua­nia are EUR 40 lower (around EUR 791). In Es­to­nia, costs are EUR 137 lower (costs around EUR 694).


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