Every year, with more than 200 various tax reliefs applied to businesses and citizens, the state budget does not get about 2.5 billion euro. Tax relief can be a quick way for the state to provide financial support to solve specific problems.
Hence, each tax relief must be justified and meaningful. The State Audit Office has concluded during the audit that it has not been systematically assessed so far which types of tax relief would be really necessary and what problems they have already solved. In the absence of information on the impact of tax reliefs, no sound decisions on changes in tax reliefs can be made so that the Latvian society would receive the necessary forms of support.
“In essence, tax reliefs, tax discounts, and tax exemptions can be seen as an invisible part of government budget spending. Decisions on whom, how much, and why to grant one or another tax relief should be well grounded so that state support for citizens and businesses would be meaningful and really addressing topical issues. By reviewing the tax relief system in essence, giving up unnecessary reliefs, and purposefully keeping the necessary ones, it will be easier for the government to work without raising the taxes,” stated Auditor General Elita Krūmiņa.
There are more than 200 different tax reliefs in Latvia, which have not had clear objectives set because of historical or poor-quality policy planning. There are also no criteria to assess whether the relief has brought some benefit. In cases where new tax reliefs are introduced or existing ones are reviewed, it is not possible to compare the effects of specific reliefs.
For example, the introduction of a differentiated minimum income tax rate should have ensured that low-income people with low income would have more money at their disposal every month. Unfortunately, the conclusion is quite the opposite because low-income people paid more in tax than they should, so no more money was left at their disposal, but overpaid tax money can only be recovered the next year after the income declaration is submitted.
The lack of cooperation among the authorities is also a drawback of the tax relief system leading to the fact that different ministries deal with the same problem on their own, but their actions are not coordinated. For instance, job creation for people with disabilities is supported by both tax policy and welfare policies – corporate income tax rebates and financial support from EU funds and the state budget. However, neither the Ministry of Welfare nor the Ministry of Finance co-ordinates their activities for such joint support, and the Ministry of Welfare recognises the lack of unified support for entrepreneurs who integrate persons with disabilities in the working environment itself.
The lack of data is one of the obstacles to the systemic assessment of tax reliefs. Neither the Ministry of Finance nor the sectoral ministries are obliged to collect comprehensive information on reliefs and have not had the desire to do so. Only the Ministry of Agriculture, on its own initiative, collects data on state aid provided in the sector regularly by also using the information on tax relief prepared by the Ministry of Finance.
Evaluating tax reliefs would require clarity on how efficiently they are administered, but it cannot be assessed at the national level, as the authorities do not collect information on the cost of administering tax reliefs either. For example, the auditors have estimated that the processing of each citizen’s annual tax declaration costs up to 50 euro to the State Revenue Service even if the amount repayable from the state budget is only a few euros.