Tax changes will work if VAT is not increased - employers' organization

RIGA - The Confederation of Employers of Latvia (LDDK) agrees to push forward the tax reform proposal presented on Friday for inclusion in the 2025 state budget package with reservations that this system can work if the value added tax (VAT) is not increased, LDDK President Andris Bite told LETA.

The LDDK also believes that the system can work if work is continued on reducing public spending, and work is continued to achieve labor tax competitiveness also in the sector of high wages.

Bite pointed out that the LDDK's goal for changes in tax policy was to simplify the tax system and make Latvia's labor taxes competitive in the Baltic region.

"We insisted and continue to insist on a 5 percent reduction in government spending, which would allow funding of security and other priorities and serve as a compensatory mechanism for the introduction of labor tax changes," Bite emphasized.

He pointed out that the first of the objectives has been achieved, as the move from a differentiated to a fixed tax-free minimum income is expected as early as 2025, which will simplify tax administration processes. At the same time, Latvia's labor tax competitiveness among the Baltic countries has been partially achieved - further work is needed to boost the competitiveness of high wage taxes.

"As regards compensatory mechanisms, unfortunately we do not see significant savings in the government spending, instead the path chosen is to use the second tier of pensions," Bite said.

At the same time, Bite pointed out that it is also important for the LDDK to talk about the process by which this result was reached. From the perspective of business, the work on tax reform has been unforgivably long and non-transparent, and the LDDK expects more productive cooperation with ministries in the future.

As reported, as of next year, the government plans to up the personal income tax rate, set a fixed and higher non-taxable minimum, as well as raise the minimum wage, Finance Minister Arvils Aseradens (New Unity) said a news conference Friday.

According to the minimum wage algorithm, its size will be 45-50 percent of Latvia's average wage, with a tendency towards 50 percent. In 2025, the minimum wage is set at EUR 740, in 2026 at EUR 780, in 2027 at EUR 820 and in 2028 at EUR 860.

There are also plans to simplify the tax-free minimum, setting it at EUR 510 in 2025, EUR 550 in 2026 and EUR 570 in 2027. In 2028, too, the tax-free minimum is planned at EUR 570, but this could be increased from a budgetary point of view, Aseradens said. The minister added that the tax-free minimum should gradually go up to 80 percent of the minimum wage.

At the same time, a non-taxable minimum of EUR 650 is foreseen for pensioners from next year.

The agreement also provides for the introduction of two rates of personal income tax - a 25.5 percent rate on annual earnings of up to EUR 105,300, or EUR 8,775 per month, and a 33 percent rate on income above EUR 8,775 per month.

The agreement also provides for an additional income tax rate on earnings above EUR 200,000 per year, taking into account all income - wages, dividends, capital and other income. From 2027, such income could be subject to an addition 3 percent rate of personal income tax.

As a compensatory mechanism, a one percentage point transfer of contributions from the second tier to the first tier of pensions is foreseen.

This is provided in the agreement on labor tax changes reached between the government coalition and the social partners.