Latvia has the lowest total tax rate for businesses in the Baltic States

12 January 2016

Latvia’s total tax rate of 35.9% for businesses is still the lowest across the Baltic States (49.4% in Estonia and 42.4% in Lithuania), according to the latest edition of the Paying Taxes report from the World Bank Group and PwC. Croatia has the lowest rate in the EU and EFTA region (20%), with the highest rate in France (62.7%). Overall, Latvia’s total tax rate ranks 27th globally and 12th in the EU/EFTA region.

Latvia’s total tax rate of 35.9% is made up of 6.3% corporate income tax, 26.6% labour taxes, and 3% other taxes. The model company takes 193 hours to comply with its Latvian tax requirements, which is above the EU/EFTA average of 173 hours. However, with only seven payments a year, Latvia’s indicator is among the lowest globally and in Europe, ranking third in the EU/EFTA region (after Norway and Sweden in first and second place respectively).

Compared with 32 EU/EFTA countries, Latvia has a low rate of profit tax and medium labour taxes.

Zlata Elksnina-Zascirinska, chair of the board of PricewaterhouseCoopers SIA, said:

“Businesses often complain about the Latvian tax burden, but having studied how our indicators compare with other European countries, I see no real grounds for complaining. The shadow economy is a far more serious threat to businesses in Latvia that distorts competition and places a huge burden on the honest taxpayer, because the problem lies in tax evasion, not the amount of tax you have to pay.

To encourage businesses to trust the tax system, Latvia needs to adopt a tax policy that defines priority industries eligible for support and to set up a small yet efficient government. The State Revenue Service should promote a culture of paying taxes and fight tax evasion by differentiating between good and bad taxpayers and offering tailored ways of cooperation. It’s wrong to put the same pressure on fraudulent defaulters and those who are ready and willing to pay taxes but have made a mistake due to their ignorance or lack of skill.”

Ilze Rauza, director of the tax practice of PricewaterhouseCoopers SIA, said:

“Compared to other European countries, including Lithuania and Estonia, our indicators show that Latvia’s total tax rate is highly competitive, but it still takes us too long to comply with our tax requirements – 193 hours, which is considerably more than in Estonia, Lithuania and the European average. Electronic filing plays a key role in improving this indicator. Looking at other economies, we see that full implementation of electronic filing coupled with linking all the government databases and information systems in Poland, for instance, has helped them considerably cut the time it takes to comply with their tax requirements.”

In addition to comparing global and European economies, Paying Taxes 2016 finds that electronic tax filing and payments were the most common tax reform undertaken by countries worldwide during the past year. As a result, paying taxes became easier for medium-size companies globally, but the focus moved from reducing tax rates for companies to embracing technology and relieving their compliance burden. The report also shows that low-income economies continue to face the biggest reform challenges.

Paying Taxes 2016 finds that on average, the model company has a Total Tax Rate (as defined under the Doing Business methodology) of 40.8 percent of commercial profits, down by just 0.1 percentage point from last year. It makes 25.6 tax payments per year and takes 261 hours to comply with its tax requirements, a drop of two hours compared to last year.

Over a ten‑year period covered by the study, the global average time to comply has declined by 61 hours and the number of payments sub-indicator by 8.2 payments, largely due to the introduction and improvement in electronic filing and payment systems. Electronic filing continues to have a significant impact in easing the burden of tax administration. Globally, the most common feature of tax reform in the past year was the introduction or enhancement of electronic systems for filing and paying taxes.

Economies that have invested in online filing and payment infrastructure are reaping a digital dividend from these systems. Low income economies, however, which often have a substantial compliance burden, have shown the least reduction in the time to comply and the number of payments sub-indicator. This suggests that there are other challenges to be overcome in these economies, such as the availability of modern communications infrastructure, before the tax system can be substantially reformed. The study also discusses the benefits that good tax compliance systems can have in helping to reduce the size of the shadow economy.

While there was a small decrease in the global average Total Tax Rate, there was much more of a patchwork at regional and national level in 2014. The Total Tax Rate in Africa, Central Asia & Eastern Europe, and the Middle East rose due to increases in a variety of taxes, while 30 reforms made it less costly for firms to pay taxes. Across the globe, 46 economies showed an increase in their Total Tax Rate in 2014, while it dropped in 41 countries.

Paying Taxes also finds that on average for companies around the world, labour taxes are a similar cost to profit taxes – with both labour taxes and profit taxes averaging 16.2% each of commercial profits worldwide, and four fifths of the taxes paid directly by businesses.

Augusto Lopez-Claros, Director, Global Indicators Group, Development Economics, World Bank Group, said:

“Taxes are essential to finance public services and development globally. The design of a tax system can influence firms’ decisions on whether to operate in the formal sector. It’s encouraging that economies worldwide continue to introduce substantial improvements in their tax environment. It means both an easing of the burden on business, and sustainable revenues for governments.”

The Paying Taxes study is conducted in 189 economies around the world. This year marks the tenth year of the publication. For more information about the Paying Taxes study, visit www.pwc.com/payingtaxes.

Paying Taxes 2016 measures all mandatory taxes and contributions that a medium-size company must pay in a given year (2014 in this case). Taxes and contributions measured include the profit or corporate income tax, social contributions and labour taxes paid by the employer, property taxes, property transfer taxes, dividend tax, capital gains tax, financial transactions tax, waste collection taxes, vehicle and road taxes, and other small taxes or fees.