Latvia: Latest working life developments – Q4 2017

The state budget for 2018, tax reforms, the ending of strike action by healthcare workers, and continued wage growth are the main topics of interest in this article. This country update reports on the latest developments in working life in Latvia in the fourth quarter of 2017.

State budget adopts 172 new legislative acts

The 2018 state budget entailed important changes in legislation, many of them tax reforms. This resulted in the adoption of 172 new legislative acts, valid from 1 January 2018. Despite important changes in legislation, the state budget was adopted on time and, atypically for Latvia, without any tension. Employer representatives criticised some aspects of the proposed changes in the tax system, yet did not oppose them at the adoption stage. One reason for the smooth process was the effective communication between the government and society in general – the social partners in particular.

Tax reforms aimed at progressive goals

The tax reforms concern four areas:

  • wage taxes;
  • company income tax (triggering loss of tax income);
  • elimination of the shadow economy;
  • compensation mechanisms for expected loss of budget income.

The aim of the changes is to eliminate inequality and to develop the national economy.

Wage taxes

The minimum wage has increased from €380 to €480 per month and instead of the previous flat rate for personal income tax, valid until 2017, the tax rate is now differentiated from 20% to 31.4%, depending on annual income. Differentiated non-taxable income for the calculation of a personal income tax has increased, along with the level of non-taxable income for a dependent child, to €200.

Solidarity tax has also changed. This tax is levied on the part of highly-paid employees’ salaries which exceeds the ceiling for mandatory social security contributions. Up to 1 January 2018 all revenues of this tax were transferred to a general government budget to finance the increasing need for social protection and inequality reduction. Although there is no change in the general aim of the solidarity tax, from 1 January, part of the revenues will be transferred to the healthcare and pension budgets.

Company income tax

A 0% tax rate for re-invested profits has been introduced, while the rate for distributed profits is 20%. Furthermore, a two-year transition period has been established for the distribution of previously accumulated profits with a tax rate of 10% (20% is applied starting from the third year) and advance payments of company income tax have been abolished.

The shadow economy

Measures to reduce the shadow economy include new rules on value added tax and increasing control over the tax regime, especially in small enterprises in sectors where the shadow economy is traditionally high.

Compensation mechanisms

A number of mechanisms have been introduced to compensate for expected loss of income. These include: an increase in company income tax on assets and the containment of eligible expenses; an increase in excise tax for some products, including fuel; an increase in gambling tax; the establishment of social contributions (5% rate) for royalties and individual economic activities; and a reduction in income level for microenterprise tax payers to €40,000, from €100,000.

Demands of social partners partly respected

Additional funding of €200 million has been allocated for healthcare workers in 2018, compared with 2017, and talks were started about a new model of healthcare financing, based on the insurance principle. Healthcare workers announced an end to their strike, begun on 3 July 2017, in December.

Continued growth in wages

According to the Central Statistical Bureau of Latvia, gross wages increased in the third quarter of 2017 (year on year) by an average of 7.5%. This figure breaks down, on average, to 8.5% in the government sector (10.5% in ministries), and to 7.7% in the private sector. Despite a remarkable increase in 2017, the government has announced that wages in the state administration will increase in order to provide competitiveness with the private sector.

Outlook

It is expected that there will be slower growth in 2018 than in 2017, but it will be positive, because of the roll-out of EU funds. The 2018 state budget allows for further wage growth in the public sector and this is also expected by employers in the private sector. EU funds have facilitated economic activity, and employers report a shortage of workers which will push wages up. An increasingly hot issue is the migration of Latvian workers and, consequently, the start of a labour shortage crisis, triggered by increasing private demand and the activity of commercial banks.

In the first quarter of 2018, the implementation of tax changes will spark activity by the social partners. They supported the tax reforms, but also pointed out several possible negative impacts, especially from those reforms aimed at compensation for loss of income. If these negative impacts outweigh the gains of the tax reform, the social partners will need to seek solutions.

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