Inga Langaitė. Deconstructing the Tax Reform – How to Increase Budget Revenue Without Imposing a Greater Tax Burden on Local Creators of Added Value?

May 23, 2023
Inga Langaitė. Deconstructing the Tax Reform – How to Increase Budget Revenue Without Imposing a Greater Tax Burden on Local Creators of Added Value?

While moderately positive, the hitherto secretive, long-in-development tax reform proposal made by the Ministry of Finance offers no breakthrough in improving Lithuania’s regional competitiveness or attracting and retaining capital.

We should be striving to boost Lithuania’s regional competitiveness by seeking new tax payers and thereby increasing budget revenue – not imposing a greater tax burden on local creators of added value.

Let’s start with the good, namely – changes to stock option regulations. The State Tax Inspectorate now has a more liberal attitude in this matter, and the proposal has been made to allow former employees to obtain stock options, too. What’s crucial is that, in the draft remark submitted for public comment, the Inspectorate dispenses with the earlier notion which linked the definition of “option” with the concept provided in the Law on Financial Institutions, even though it has no relevance in this case, because its definition applies to an altogether different measure.

If any problems arise in practice regarding what is and isn’t an option, all terms relevant to the Law on Personal Income Tax ought to be included in the Law itself. In addition, we’re proposing that options should be stipulated in the Law as neutral with regards to company type, because employers’ capital doesn’t necessarily consist of shares, and may be subdivided. Moreover, foreign companies, based on international employee incentive schemes, often give options to financial instruments tied to their shares – a normal practice in both Europe and the US.

The investment account proposals are laudable as well, although they won’t have any direct impact on startups. We appreciate the loosening of associated regulations, whereby the cap on contributions, as well as other restrictions, are removed, and only profit is taxed. Such ambitiously liberal regulation of investment accounts will likely encourage people to use investment instruments and, being among the most favourable in the region, make the Lithuanian tax jurisdiction more attractive.

Another example is the progressive non-labour income tax (5% and 7%), whereby additional taxation is imposed not only on income from employment, but also on capital gains. While, from a basic accounting point of view, this may seem attractive in terms of raising budget revenue, it fails to consider that, as taxation changes, so does the economic behaviour of entities subject thereto.

Furthermore, the proposed momentary fixed asset depreciation method pales in comparison to the alternative levy on distributed profit (i.e., a 0% income tax on reinvested profits) when it comes to investment. This won’t have any significant impact on startups – and the same can be said of other slight improvements (those related to self-employment, and bringing the non-taxable income amount closer to the minimum monthly wage).

Without taking account of the proposals made by businesses, all these corrections are, essentially, cosmetic. We’ve always argued that changes to the taxation regime should increase Lithuania’s regional competitiveness, rather than decrease it. For this reason, it’s important to balance taxation in a way that would enable us to attract new taxpayers.


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