Taxing Wages 2018

Latvia

Abstract

This chapter includes data on the income taxes paid by workers, their social security contributions, the family benefits they receive in the form of cash transfers as well as the social security contributions. Results reported include the marginal and average tax burden for eight different family types.

Methodological information is available for personal income tax systems, compulsory social security contributions to schemes operated within the government sector, universal cash transfers as well as recent changes in the tax/benefit system. The methodology also includes the parameter values and tax equations underlying the data.

 

 

Since 2014 the Latvian currency is the Euro (EUR). In 2017, EUR 0.89 was equal to USD 1. That year, the average worker in Latvia earned EUR 10 905 per year (Secretariat estimate).

1. Personal income tax system

1.1. Central government income tax

1.1.1. Tax unit

The tax unit are individuals.

1.1.2. The main tax allowances

1.1.2.1. Standard tax reliefs:

• A general (basic) allowance:

• In 2017 is applied non-taxable minimum EUR 60 per month for all working persons, but low income earners will receive overpaid personal income tax based on the differentiated non-taxable minimum as described below.

• In 2016, the differentiated non-taxable minimum has been introduced.

The differentiated non-taxable minimum will vary depending on income level: higher for lower wages, but less for higher wages (see table below). Besides it provides that two parallel non-taxable minimums will be apply – monthly and annual.

Differentiated non-taxable minimum criteria’s

	2016	2017
Maximum non-taxable minimum, EUR per month	100	115
Minimum non-taxable minimum, EUR per month	75	60
Taxable income* minimum threshold up to which the maximum annual non-taxable minimum will be applied, EUR per month	380	400
Taxable income* maximum threshold up to which the annual non-taxable minimum will be applied, EUR per month	1 000	1 100

* When calculating the taxable income not only wages, but also other income (such as dividends and income from real estate) will be taken into account. Similarly, if a person works in several jobs, the salaries will be added together and the non-taxable minimum will be applied to total revenue.

In 2016 compare with 2015 nothing changed and, as before, every month had applied non-taxable minimum EUR 75 per month for all working persons. Differentiated non-taxable minimum for 2016 had applied only in 2017 when taxpayer submits annual tax return to SRS: for small income earners (up to EUR 380 per month) – EUR 100 per month or EUR 1 200 per year, for persons who receive income from EUR 380 to 1 000 per month – non‐taxable minimum applying a formula gradually decreases until at income level over EUR 1 000 per month – it remains EUR 75 per month or EUR 900 per year.

Be noted that is developed the State Tax Policy Guidelines 2018-21, by which is planned to introduce tax reform, including changes on criteria for the differentiated non-taxable minimum, as well as conditions for applying.

• The allowance for dependents (which in most cases are children) of EUR 175 per month or EUR 2 100 per year (EUR 165 per month or EUR 1 980 per year in 2015) is also deductible from individual income. In addition from the list of dependents persons who are able to work has been excluded from 2016.

• From 2017 additionally the tax allowance for dependents is expanded by non-working spouse, who dependents are minor child with a disability, if the non-working spouse does not receive taxable income or State pension.

• To support youth employment during the summer (from 1 June to 31 August), parents can still receive tax allowance for dependents (children while it are working relation) EUR 175 per month (EUR 165 per month in 2015).

• Relief for social security contributions: Employee’s state social security contributions are deductible for income tax purposes.

• Tax credits: None for employees

1.1.2.2. The main exemptions:

• capital gains on immovable property if the ownership is more than 5 years and it is place of residence more than 1 year;

• capital gains on immovable property if the ownership is more than 5 years and the last 5 years this immovable property has been the only immovable property of the payer;

• income from business or self-employed activities in field of rural tourism or agricultural manufacturing up to turnover of EUR 3 000 per taxation year, including the sums of State aid for agriculture or of the European Union aid for agriculture and rural development in amount EUR 3 000 per taxation year;

• supplementary pension capital, which is formed from the same natural person or his or her spouse, or in kinship relations to the third degree;

• scholarships to 280 euros per month;

• income obtained as a result of inheritance;

• allowance (alimony);

• income from the alienation of personal property (movable objects such as furniture, clothing and other movable objects belonging to an individual intended for personal use) that is not related to business activities;

• goods and services lottery prizes;

• revenues from gifts up to EUR 1 425 from natural person, other than a close relative etc.

• revenues from gifts in full amount from natural persons, if the giver is connected to the payer by marriage or kinship to the third degree.

1.1.3. Tax schedule

2017 the tax rate of 23% applies for all levels of taxable income (the same rate was applied in 2016).

1.2. Regional and local income tax

No regional and local income taxes.

2. Compulsory social security contributions to schemes operated within the government sector

The state social security contribution system consists of six schemes as follows:

• state pension insurance;

• social insurance in case of unemployment;

• social insurance in respect of accidents at work and occupational diseases;

• invalidity insurance;

• maternity and sickness insurance;

• parental insurance.

In additional from 1 January 2016 is introduced a Solidarity tax. The solidarity tax represents a new progressive element in the labour taxation system. In 2014 and 2015 no social contributions were paid for wages exceeding a certain threshold (EUR 46 400 per year in 2014 and EUR 48 600 per year in 2015). From 2016 solidarity tax is applied to workers earning more than EUR 48 600 per year, but in 2017 solidarity tax is applied to workers earning more than EUR 52 400 per year. Solidarity tax rate are at the same level as current social security contributions rates (10.5% and 23.59%). Solidarity tax revenue is transferred to the state budget and not tied to social services.

2.1. Employees’ contributions

Employees pay 10.5% of their earnings in contributions. The taxable base is the total amount of the gross wage or salary including vacation payments, fringe benefits and remuneration of expenses related to work above a certain threshold. The assessment period is the calendar month.

2.2. Employers’ contributions

Social security contributions are also paid by employers at a rate of 23.59% on behalf of their employees. The taxable base and the assessment period are the same as for employees’ contributions.

The total contribution rates paid by employees and employers are applied:

 

Scheme name	Rate of contribution (%)
Pension insurance	24.54
Unemployment insurance	1.90
Insurance of accidents at work and occupational diseases	0.48
Invalidity insurance	2.30
Maternity and sickness insurance	3.49
Parental insurance	1.38
Total	34.09

3. Payroll tax

The Business risk fee is paid in in the state basic budget, then transferred to the Employee claim guarantee fund which is administrated by the state agency “Insolvency administration”. The Insolvency administration is a public institution controlled by the Ministry of Justice.

If an enterprise is insolvent, the Insolvency Administration satisfies employee claims for their unpaid salaries, compensations for the paid annual leaves and compensations for dismissal in case of the end of the employment relationships.

The Business risk fee does not confer entitlement to any kind of social benefits.

The Business risk fee is a constant payment for a person EUR 0.36 per employee per month.

4. Universal cash transfers

4.1. Transfers related to marital status

None.

4.2. Transfers for dependent children

From 2015 support for families has been introduced through differentiated family benefits: EUR 11.38 per month for the first child, plus EUR 22.76 per month for the second child, plus EUR 34.14 per month for the third child, plus EUR 50.07 per month for the fourth and each subsequent child (EUR 50.07 for forth child and each subsequent child only from 2017). The state pays family benefits to all children until they reach the age of 15. Children enrolled in basic or secondary schools or vocational education institutions operating on the basis of basic education have the right to receive family benefits until the age of 19.

In addition there are four other types of family benefits for which payment depends on either the age of the child(ren) and/ or the status of the person(s) looking after them: maternity and paternity benefit; childbirth benefit; parental benefit; child care benefit (additional benefit for child with disabilities). These are not included in the modelling.

5. Main changes in tax/benefit system in 2017

• Additionally the tax allowance for dependents is expanded by non-working spouse, who dependents are minor child with a disability, if the non-working spouse does not receive taxable income or State pension.

• In 2017 is applied non-taxable minimum EUR 60 per month for all working persons (EUR 75 per month for all working persons in 2016).

• Differentiated non-taxable minimum for 2017 will apply only in 2018 when taxpayer submits annual tax return to SRS: for small income earners (up to EUR 400 per month) – EUR 115 per month or EUR 1 380 per year, for persons who receive income from EUR 400 to 1 100 per month – non-taxable minimum applying a formula gradually decreases until at income level over EUR 1 100 per month – it remains EUR 60 per month or EUR 720 per year.

In 2017 is able to receive the overpaid personal income tax by differentiated non-taxable minimum for 2016 if taxpayer submits annual tax return to SRS.

• Solidarity tax is applied to workers earning more than EUR 52 400 per year (in 2016 it instead was EUR 48 600 per year). Solidarity tax rate are at the same level as current social security contributions rates.

• State family benefit has been extend by increasing benefits to EUR 50.07 per month for the fourth child and each subsequent child (EUR 11.38 per month for the first child, plus EUR 22.76 per month for the second child, plus EUR 34.14 per month for the third child and each subsequent child in 2016).

6. Memorandum items

6.1. Average gross annual wage earnings

In Latvia the gross earnings figures cover wages and salaries paid to individuals in formal employment including payment for overtime. They also include additional bonuses and payments and other payments such as for the annual and supplementary vacations, public holidays, sick pay (sick-leave certificate A), payment for public holidays and other days not worked, social security compulsory contributions paid by the employees and personal income tax, as well as labour remuneration subsidies.

6.2. Employer contributions to private pension and health schemes

Some employer contributions are made to private health and pension schemes but there is no relevant information available on the amounts that are paid.

Latvia

2017 parameter values

Average earnings/yr	Ave_earn	10 905	Secretariat estimate
Average earnings/yr-1	Ave_earn_prevYear	10,140
Allowances	Basic_al	720
	Child_al	2 100
Income tax	Tax_rate	0.23
Employers SSC	SSC_rate1	0.2359
Payroll tax Business risk fee	payroll	4.32
Income ceiling	Ceiling	52 400
Employees SSC	SSC_rate2	0.105
Child allowances	CA_first	136.56
	CA_second	273.12
	CA_third	409.68
	CA_fourth and each next	600.84
Days in tax year	numdays	365
Differentiated non-taxable minimum criteria for year-1
Minimum non-taxable minimum	MIN_non_taxable	900
Maximum non-taxable minimum	MAX_non_taxable	1,200
Taxable income* maximum threshold up to which the annual non-taxable minimum will be applied	Income_for_MIN_non_taxable	12,000
Taxable income* minimum threshold up to which the maximum annual non-taxable minimum will be applied	Income_for_MAX_non_taxable	4,560

2017 tax equations

The equations for the Latvian system are mostly on an individual basis.

The functions which are used in the equations (Taper, MIN, Tax etc) are described in the technical note about tax equations. Variable names are defined in the table of parameters above, within the equations table, or are the standard variables “married” and “children”. A reference to a variable with the affix “_total” indicates the sum of the relevant variable values for the principal and spouse. And the affixes “_princ” and “_spouse” indicate the value for the principal and spouse, respectively. Equations for a single person are as shown for the principal, with “_spouse” values taken as 0.

 

	Line in country table and intermediate steps	Variable name	Range	Equation
1.	Earnings	earn
2.	Allowances:	tax_al	P	=MIN(Basic_al+SSC_empee_princ+(Children>0)*(Child_al*Children);earn_princ)
			S	=Min(Basic_al+SSC_empee_spouse,earn_spouse)
3.	Credits in taxable income	taxbl_cr	B	0
4.	CG taxable income	tax_inc	B	Positive(earn-tax_al)
5.	CG tax before credits	CG_tax_excl	B	Tax_inc*tax_rate
6.	Tax credits :	tax_cr	B	0
7.	CG tax	CG_tax	B	CG_tax_excl-tax_cr-Addit_al_diff_from_prevYear
8;	State and local taxes	local_tax	B	0
9.	Employees’ soc security	SSC_empee	B	= earn*SSC_rate2
11.	Cash transfers	cash_trans	J	=IF(Children<1;0;IF(Children=1;CA_first;IF(Children=2;CA_first+CA_second;IF(Children=3;CA_first+CA_second+CA_third;IF(Children=4;CA_first+CA_second+CA_third+CA_fourth_and_each_next;IF(Children>4;CA_first+CA_second+CA_third+CA_fourth_and_each_next*(Children-3)))))))
13.	Employer’s soc security	SSC_empr	B B	=earn*SSC_rate1 =payroll
14.	Overpaid tax previous year	Diff_non_taxable_min_prevYear	B	IF(earn_prevYear-Income_for_MAX_non_taxable<0,MAX_non_taxable,(IF((MAX_ non_taxable-Coefficient*(earn_prevYear-Income_for_MAX_non_taxable))>MIN_ non_taxable, (MAX_non_taxable-Coefficient*(earn_prevYear-Income_for_MAX_ non_taxable)),MIN_non_taxable)))
		Addit_al_diff_from_prevYear	B	IF(earn_prevYear<=Income_for_MIN_non_taxable, (Diff_non_taxable_min_prevYear-MIN_non_taxable)*Tax_rate,0)

Key to range of equation B calculated separately for both principal earner and spouse P calculated for principal only (value taken as 0 for spouse calculation) J calculated once only on a joint basis.