Review of Proposed Excise Tax Increase Procedure & FICIL Concerns
This document outlines a proposed procedure for increasing excise tax in Latvia, initially approved to remain in force until 2027 with a planned 10% annual increase starting in 2026. Though, there appears to be a move to alter this procedure, prompting a strong response from the Foreign Investors Council in Latvia (FICIL).Here’s a review, broken down into the proposed procedure, FICIL’s concerns, and a summary assessment:
1. Proposed Procedure (as currently understood):
* Existing Framework: an excise tax increase procedure was previously approved, guaranteeing increases of 10% annually starting in 2026 and continuing until 2027.
* Potential Change: There’s an indication of a desire to deviate from this pre-approved plan, perhaps with a larger, more immediate increase (mention of a 15% increase from january 1st is made).
2.FICIL’s Concerns – A Detailed Breakdown:
FICIL’s letter presents a compelling case against abruptly changing the established excise tax increase procedure.Their concerns center around several key areas:
* Supply Chain Disruption & Transition Period: Companies relying on distribution models (without local manufacturing) require a significant lead time (approximately six months) to adjust to excise duty changes. This includes ordering, securing necesary codes/stamps, production planning, and clearing existing stock.
* Legal Certainty & Contractual Obligations: Companies have already based pricing and contractual agreements on the planned 10% increase. Sudden changes undermine confidence in a stable legal habitat,violating principles enshrined in the latvian Constitution and EU law.
* International Best Practice: FICIL highlights that many EU countries implement tax changes gradually, providing businesses with adaptation time. They specifically cite examples from Estonia and Lithuania, which utilize phased increases.
* Market Shock & Shadow Economy: A large, immediate increase (like 15%) is predicted to cause:
* Price spikes & consumer shock.
* Breach of contracts.
* Significant financial losses for businesses.
* A 12-13% contraction of the legal market.
* Growth of the shadow economy (currently already significant,with over 50% of excise-paid products sourced from illegal factories).
* fiscal Neutral Alternatives: FICIL proposes a gradual 10% increase as a fiscally responsible alternative, minimizing the risk of driving consumers to the illegal market and ensuring more predictable tax revenues.
* Litigation & Investment Climate: Abruptly altering the approved procedure carries significant legal risks, including potential lawsuits for damages. It also damages Latvia’s reputation as a predictable and investment-friendly environment, potentially leading to international investment disputes.
3. Summary Assessment:
FICIL’s arguments are well-reasoned and supported by practical considerations and comparative examples. Their concerns are not simply about protecting business profits; they highlight potential negative consequences for the Latvian economy as a whole.
Key Strengths of FICIL’s Position:
* Focus on Practicality: They clearly articulate the logistical challenges faced by businesses.
* Legal Basis: They ground their arguments in constitutional principles and EU law.
* Comparative Analysis: They demonstrate that their request for a transition period is aligned with best practices in neighboring EU countries.
* Fiscal Obligation: They offer a fiscally neutral alternative that aims to achieve revenue goals without damaging the legal market.
* Long-Term Outlook: They emphasize the importance of maintaining a stable investment climate.
Potential Weaknesses (not explicitly stated in the document, but worth considering):
* Revenue Urgency: The document doesn’t address why the government is considering deviating from the pre-approved plan. There might potentially be urgent revenue needs driving this change.
* Political Considerations: There may be political pressures to demonstrate a stronger stance on excise duties.
Recommendation:
The Finance Minister (FM) should seriously consider FICIL’s concerns. Abruptly changing the approved excise tax increase procedure carries significant risks and could ultimately be counterproductive. Maintaining the pre-approved schedule of 10% annual increases,with a six-month transition period for each adjustment,appears to be the most prudent and fiscally responsible course of action. A thoughtful and balanced approach,as FICIL advocates,is crucial for fostering a stable and predictable business environment in Latvia.
