Latvia should be careful of adopting Estonia’s model in the tax system
Latvia should watch out for the so-called Estonian model’s introduction in the country’s tax system, says World Bank senior economist Emilija Skroka. World Bank experts are sceptical about this idea.
Skroka arrived in Riga for the presentation of the World Bank’s report on Latvia’s tax policy.
It was previously mentioned that Latvia’s Finance Ministry plans to introduce Estonia’s model, which provides for putting off the payment of corporate income tax until the moment of division of profits. The ministry admits that doing so would help introduce a stimulus to enhance the competitiveness of local businesses.
Skroka says that Latvia has asked the World Bank to assess the aforementioned Estonian model. Experts of the bank said they are sceptical about it.
«The World Bank cannot say if there is no point for Latvia to introduce Estonia’s model, but the World Bank advises that Latvia is careful with it. It is always easier to create an expensive reform than it is to come up with a reform that is good and not as expensive. Latvia’s economy is unstable, small and influenced by external factors. This is why Latvia requires a fiscal buffer. Estonia’s model is expensive. In addition, it is possible to predict its effect,» said the expert.
Skroka notes that representatives of the World Bank and Latvia performed discussions about tax progressiveness. They also discussed reduction of VAT and its cancellation for hotels and the accommodation sector.
The presented assessment of Latvia’s tax policy is not different from what World Bank experts had presented last December. Nevertheless, slight changes apply for excise tax revenue. Representatives of the World Bank were also provided by Finance Ministry’s opinion that real estate tax matter is one of the most important parts of the new tax policy.
«The proposal presented today is rather similar to what was presented in December. We were given a task to ensure Latvia’s tax revenue at 33% of GDP instead of the current 29%. All proposals included in the report are intended to assist in accomplishing this goal,» Skroka said.
When asked about the influence of the World Bank’s proposals on Latvia’s GDP, she said that proposals cover different tax changes. However, to measure their influence on GDP, it is first necessary to assess each measure separately. «In any case, World Bank’s proposal will have a positive effect on economic growth,» the expert said.
«It is also known that Finance Ministry has used a couple of ideas proposed by the World Bank in its tax policy strategy. In any case, the World Bank values the proposal to reform micro-enterprise tax and improve tax progressiveness and efficiency,» Skroka said.