PROBLEMATIC ASPECTS OF MICRO-ENTERPRISE TAX IN LATVIA

Abstract

The number of micro-enterprises, especially in the sphere of individual services, choosing to be the micro-enterprise taxpayers has increased since the introduction of the micro-enterprise tax in 2010. The share of micro-enterprise tax (MET) revenues in the state budget outlines an annual growing tendency. The MET plays an essential role in the improvement of the business environment in Latvia and in the increase of economic activities in rural regions. However, this tax due to the gaps of legislation is still applied not only by new entrepreneurs but also by the existing companies to reduce significantly the tax burden, thus, creating an unequal tax competition with other companies paying taxes consistent with the general procedure. The practical application of the MET highlights two main problems: 1) unfair tax competition among companies which is based on the fact that the dividend amount of capital companies is not limited in the micro-enterprises, and hence, these companies may considerably reduce the tax burden; 2) the establishment of a micro-enterprise only to reduce the labour costs would lead to the reduction of the amount of social insurance paid for employees and consequently to the reduction of the social security in the future. The research aim is to assess the former results related with the introduction of the MET and to provide solutions for the prevention of problematic aspects. The research results outline the necessity for the amendments in the Micro-enterprise Tax Law which would prescribe the maximum amount of dividends for the owners of capital companies – MET payers. Whereas, the MET rate should be related with the share of labour costs in the micro-enterprise to increase the amount of the state social insurance paid for the employees of micro-enterprises. It is recommended to increase the tax rate up to 12% if the share of labour costs exceeds 40% and to apply a 15% tax rate if the share of labour costs exceeds 60%. This would ensure the state social insurance object for the employees of micro-enterprises which is close to the state determined minimum salary. It is not recommended to increase the MET rate for other micro-enterprises where the share of labour costs does not exceed 40%, since this would reduce the competitiveness of these micro-enterprises.