President proposes tax changes: tax the self-employed more, apply preferential wages

The Presidency makes three proposals to the Group of Tax Experts to link them to separate objectives.

“A fair and stable tax system is one of the important pillars of the welfare state, and to this end, the president presents today three concrete proposals,” said Simonas Krėpšta, senior adviser to the president and director of the Economic and Social Policy Group.

The first goal is a post-pandemic tax incentive for faster wage growth and employment. The presidency is offering a tax credit for companies that increase payroll by more than 8 percent a year

Second, increase the fairness of the tax system and reduce unfair reserves. To this end, the presidency proposes a higher rate of personal income tax (PIT) for individual activities: 20%. It is for the part of income that exceeds 35 thousand. euros. Also 20 percent. the rate proposes to tax dividends, capital gains and other irregular income.

To increase the stability of the tax system, it is proposed to abandon the possibility of tax increases together with the budget.

In January of this year, a group of tax experts was created under the Ministry of Finance, which during February-March receives proposals for discussion, drafting of legal acts and public consultation. Decisions at the Seimas could be made in the spring session, April-June. It was announced that the government seeks to review all tax exemptions.

“We are really in close contact with the Ministry of Finance,” S. Krėpšta assured, noting that the Presidency’s proposals will be evaluated by experts and sent to the Seimas after discussions.

The incentive is less income tax by increasing wages

The proposed income tax incentive is linked to wages and employment, when the wage bill increases by 8%. There are still incentives for companies to invest in technological innovation, in research, but not in human capital.

How would the incentive proposed by the Presidency work?

If the employer increases the salary fund by at least 8 percent per year, it could deduct these additional salary increase costs twice, three times in total when calculating income tax. This would reduce taxable profits.

It is proposed to apply this benefit for five years and to introduce safeguards to prevent abuse, for example by transferring workers from one company to another. The benefit is proposed to be available to companies that have been operating for at least 2 years, that are not classified as risk contributors, and whose “increased” funds for employees do not exceed a quarter of last year’s wage costs. It is considered that this should not apply to higher wages per se.

“Given the post-pandemic period and the challenges it poses, we offer a tax incentive for companies that could take advantage of the corporate tax refund if payroll increases by more than 8 percent compared to the previous tax period,” says S. Krėpšta .

A similar relief exists in Japan, where starting in 2018. In April, companies can reduce income tax if their wages increase by more than 3%. thresholds, and the criterion is even lower for small businesses.

The presidency estimates that this would be more relevant for small and medium-sized companies in Lithuania, where it pays most of its income tax. It could be used by companies of all sectors and sizes.

It is argued that the unemployment rate has risen due to the pandemic and the current registered unemployment rate is 16.4 percent, and according to statistical surveys, 9 percent in the fourth quarter of last year.

Basically, the level of wages in Lithuania lags behind the economic progress of the country. It is explained that the country’s GDP per capita is already 80.4 percent of the OECD average, while wages are only about 60 percent of the average. Wage convergence has lagged progress in overall living standards, leading to long-standing problems of inequality and poverty. If Lithuania had grown in a balanced way, wages and the economy would have followed a similar pace.

Economic forecasts show that wage growth, which has reached around 9 percent in recent years, will slow significantly after the pandemic and is projected at 4.1 percent this year. growth, 4.5 percent next year and 5 percent a year later, according to the projections of the Ministry of Finance.

An 8 percent wage growth would allow Lithuania to keep catching up with wages in developed countries. And higher wages would also lead to a bigger budget, more redistribution.

For individual activities more than 35 thousand. offers 20%. GPM

Currently, the maximum GPM rate for individual activities is 15%. of taxable income. The presidency offers a revenue share of over 35,000. per year, taxed at 20%. at the rate applicable to the employment relationship. In this way, the objective is to reduce the differences in tax rates between different types of income.

The change would affect approximately 2.9 thousand people who earn more than 35 thousand for individual activities. annual income. Most of these people are in legal pursuits, as well as computer programming and consulting activities.

“We have various forms of activity that allow people to earn income. There are four essential forms of activity and, of course, the employment relationship is for the most part, 20% covered. GPM rate. Meanwhile, people who receive income from dividends, capital gains, or individual activities pay 15 percent. fee “, says S. Krėpšta.

According to him, labor relations in Lithuania are taxed in a similar way as in other European countries, but lower tariffs encourage the choice of other activities.

The presidency is of the opinion that existing fiscal inequalities allow so-called arbitrage – choosing the most favorable form of activity in the sense of taxes.

For example, an employment relationship is subject to 20%. GPM, but because of the benefit, the so-called tax-free income, the effective rate reaches that limit only at about 32 thousand. by year.

Proposed 20 percent. They apply not only to individual activities, but the same rates are expected to apply to income from capital gains, dividends and other income of an irregular nature.

“Going forward, the growth in non-taxable income makes it possible to reduce the taxation of labor relations as the economy grows,” noted S. Krėpšta.

He assured that taxes would not change “for absolutely no one who earns small amounts of income”, only for those who earn more than 35 thousand. by year.

You want to prepare for new taxes for at least half a year

Representatives of the presidency explain that the adoption of taxes together with the budget at the end of the year leaves very little time for the market to adapt to changes, the new tax burden falls suddenly. The budget is usually approved at the end of the year.

Therefore, it is proposed to abandon this possibility of tax increases in line with the budget. However, it is proposed to leave the possibility of tax reductions.

“The president proposes to guarantee the stability of the tax system and proposes to include in the law a provision that would prevent tax increases in more than 6 months”, says S. Krėpšta.

It is estimated that in the ten years to 2019, with the budget, taxes increased more than 50 times and were reduced less than 30 times.

In OECD countries, the period is usually longer than 150 days, or 5 to 6 months, from the publication of the taxes to their entry into force, and is usually even longer.

Lisauskas supports: he no longer wants tax changes on December 28

Kęstutis Lisauskas, a tax practice partner at EY, a professional services company, believes that all three proposals would be beneficial, especially higher taxes for high-income sole proprietors and a longer time frame for the new taxes to take effect. .

“It is worth noting that not only for taxpayers, but also for the tax administrator, those December 28 changes create enormous tensions and problems, because it requires statutes, all kinds of forms, IT solutions, etc. It just can’t be done that way. It would be very good if such an amendment were adopted, “agreed the tax expert.

It maintains that GPM’s alignment between employment and individual activities is also the right direction.

“You can still ask here, and what happens when the GPM of the employment relationship on the highest income scale is 32 percent? Why only 20% for individual activities ”, said K. Lisauskas.

It would also support tax relief for employers who invest in human capital.

“As for this Japanese benefit, there are now benefits in the income tax law that operate on a similar principle: it is an investment project benefit, it is an experimental research and development benefit. This incentive, which encourages employers to invest significantly in employees, in their salaries, could in principle be implemented. It is important which fuses will be attached to achieve the goal we strive for, not to make mistakes, ”says K. Lisauskas.

In his opinion, the most important changes would be a longer period for the entry into force of taxes and a fairer taxation of individual activities.