FICIL has reviewed the tax scenario, released by the Ministry of Finance on August 16th. While FICIL appreciates the Ministry’s efforts in preparing the scenario and engaging with stakeholders, we believe the proposal falls short in achieving several key objectives.

FICIL calls for assessing specific measures to reduce and enhance the efficiency of public administration costs, considering raising the tax burden only as a last resort for positive fiscal impact. Additionally, FICIL emphasises ensuring fairness across all taxpayer groups by promoting socio-economic behaviours that discourage participation in the shadow economy. The current model, based on IIN and its compensation mechanisms, disproportionately affects higher-paid groups, not ensuring an equitable distribution of the burden and encouraging behaviour that supports staying in the shadow economy rather than reporting higher incomes and thus increasing the tax burden.

FICIL acknowledges positive aspects within the scenario, such as the support for increasing the personal income tax (IIN) deductible for private pension fund contributions and expanding IIN relief for collective agreements. These changes would encourage greater employer investment in employee welfare and mobility. 

However, FICIL is disappointed by the absence of anticipated changes to the solidarity tax. Maintaining this tax with new IIN rates could result in an overly high tax burden for top earners, potentially reaching 40% by 2026. Additionally, the double taxation of dividends could make Latvia’s tax system less attractive to both local and foreign investors. 

FICIL is also concerned about the reduction of social security contributions for employers at the expense of contributions towards future state-funded pensions. This change, combined with higher tax rate for top earners, could increase the shadow economy and drive highly skilled talent away from Latvia. 

The tax reform was expected to reach several goals: ensure the competitiveness of labour costs in the Baltics, simplification of the labour tax system, increasing the number of employed (in target groups), increasing labour availability by promoting mobility, increasing net income (reducing inequality). FICIL believes that these goals cannot be achieved with the suggested tax scenario – several arguments are indicated below. 

FICIL highlights potential challenges regarding Latvia’s ability to sustain its labour cost competitiveness within the Baltics in the near future. Currently, Latvia does not hold the top position in labour cost competitiveness in the Baltics. From 2026, this favourable standing will only apply to salaries up to €1,500 (gross per month), relevant to relatively low-skilled labour. For salaries between €1,600 and €4,000, Latvia will rank second to Estonia. This strategy, focused on attracting investment through low labour costs rather than developing high-value sectors with better salaries, may deter foreign investors and highly skilled workers, thus limiting economic growth. Additionally, the simplification of the tax system, while initially promising with the introduction of a fixed non-taxable minimum, is hindered by a complicated transition process and retention of the solidarity tax. 

FICIL also doubts the effectiveness of current measures to boost employment among target groups, such as the long-term unemployed and those nearing retirement. Minimal reductions in employer costs do not sufficiently incentivise the necessary investment in skill development. The review of sick leave regulations is also seen as inadequate, failing to improve employment or encourage state investment in healthcare. Moreover, although increasing the mobility expense limit might attract labour from other regions, it is unlikely to reduce the outflow of workers to foreign countries, particularly given the potential offsetting effects of higher excise duties and natural resource taxes. Finally, while proposed changes may slightly increase net income for those earning up to €3,000, FICIL believes more comprehensive measures are needed to address income inequality and ensure fairness across all income groups.