Tax Policy – Efficient Tool for Development of Latvia

Abstract

Starting from 1 January 2018, Latvia introduced changes in the corporate income tax (CIT) system. In accordance with the new law, companies should pay CIT only from that part of the profit that is distributed as dividends, that is, essentially, reinvested profits were exempted from CIT. The same CIT system has been operating in Estonia since 2000, and, according to researchers and practitioners, the introduction of such system in Estonia has demonstrated its effectiveness for both companies and the state. The results of the first year of the CIT reform in Latvia show that despite a significant decrease in corporate bank lending, Latvian companies significantly increased their net turnover; their profit and profitability indicators, i.e. business performance indicators, grew even more significantly.

The aggregate growth in tax revenues paid by companies to the state budget has increased as compared to the previous periods and as compared to similar indicators of the other Baltic countries. It can be concluded that performance improvement of the Latvian companies after the CIT reform is mainly attributable to an increase in the economic motivation of companies to accumulate capital and reinvest it, as well as an increase in the funds remaining at the disposal of the companies. At the same time, the growth of tax revenues to the state budget accelerated due to the decrease of the tax burden, which resulted in promotion of company business activity. The CIT reform also contributed to growth of financial stability of the companies and some reduction in the share of the shadow economy in the companies.

The results of the first year of the CIT reform in Latvia indicate that it is expedient to introduce such tax incentive as a deferral of CIT payments until companies distribute dividends in the countries with catch-up economy, as well as the countries that plan to stimulate increase of company equity and investment activity.