KPMG tax news - October 2016
This article continues the discussion on the amendments to tax proposed by the Cabinet of Ministers. Here we describe changes in micro company tax, personal income tax, and duties and taxes on lotteries and gambling. It must, however, be taken into account that these amendments have not been reviewed by the Saeima and as such they are likely to change. Please note in addition that a seminar concerning amendments to tax laws is scheduled to be held by the tax specialists of KPMG Baltics SIA in the first weeks of January 2017.
New alternative tax payment regimes are currently under development by the Ministry of Economy and the Ministry of Finance in cooperation with business organisations. These regimes are expected to be implemented in 2018. The government has agreed that it currently does not make sense to impose restrictions, for a year or two, with regard to industries where an economic operator is not permitted to become a micro company tax payer. Consequently, this will remove the provisions of the law adopted last year to prevent economic operators in certain industries from becoming micro company tax payers.
It is planned that new micro company tax payers will be able to register by 30 June 2017. As concerns all payers of micro company tax, they will be required to choose one of the alternative tax payment regimes by 15 December 2018.
It was indicated in 2013 by the Department of Administrative Cases of the Supreme Court that the adverse consequences for tax violations should primarily arise from the specific tax law rather than only from the law ‘On Taxes and Duties’. In order to implement the above it is intended to add Article 11 and Article 12 to the ‘Micro Company Tax Law’ to specify the same amounts of fines and delay payments and the procedure of calculation as laid down in the law ‘On Taxes and Duties’.
Tax exemption for employee catering expenses
Tax will no longer be payable on staff catering expenses incurred by the employer under a collective agreement between an employer and a trade union in the amount not exceeding EUR 480 per year (EUR 40 per month) per employee. In order for the employer to qualify for this exemption the following criteria should be met:
- Total expenses on staff catering do not exceed 5% of total gross payroll expenses in the year,
- The company employs at least 6 staff,
- According to the SRS data base, as at 15 December the employer has no outstanding tax liabilities (including social contributions) that exceed EUR 150,
- During the last 2 years the employer was not found guilty of violations related to illegal employment of foreign citizens, employment without a contract or breach of work safety regulations,
- The employer has operated for at least one year,
- The employer is not under insolvency proceedings, its operations have not been suspended or it is not in liquidation.
Where the employer is a group company and the collective work agreement concerns the entire group the above criteria are applicable to the group employees as a whole. This exemption will not be available to the state, municipal institutions or companies with state or local government capital.
Tax exemption for scholarships paid to interns
Scholarships up to EUR 280 per month will be tax exempt. These are the scholarships that a company pays to a student who works for the said company as an intern according to Cabinet Regulations. Earlier only those scholarships were tax exempt that were paid from the national budget or funds of an association or foundation approved by Cabinet Regulations. EUR 280 per month is an estimated amount which equals the minimum salary after tax.
Tax exemption for assistance received from public benefit organisations
Cash received from public benefit organisations by way of assistance to provide transportation of a sick person and his/her accompanying person to a medical institution will be tax exempt. To date, this exemption applied only to the sick person but given that it is often the case that a sick person requires an accompanying person going forward the tax exemption will also apply to the accompanying person.
Tax application to payouts from pension funds
It is currently specified in the laws how to apply tax exemptions for contributions into private pension funds but no restrictions apply to payouts from pension funds. It is observed in practice that people old enough to draw the pension i.e. over 55, use contributions into pension funds as tax optimisation arrangements rather than as long-term accruals. In order to limit tax optimisation opportunities by making contributions into pensions funds, a procedure is being specified on how to apply tax to payouts from private pension funds and income from additional pension capital. The draft law proposes that going forward tax reliefs will apply only to the amounts paid into pension plans that have been invested for at least two years. If money is withdrawn in a shorter period the amounts withdrawn will be taxed. Withdraws will be allocated on a first in, first out basis.
The taxable income is determined by considering contributions into and withdrawals from the pension fund and the pension capital accrued in all pension funds. Cash transfers between pension funds will be disregarded.
The tax will not apply to the disabled of group one or in the event of death of the participant.
Tax reliefs for dependents will apply also to unemployed spouses who care for an underage child with a disability.
On tax exemption of persons who care for a child
It is laid down in Section 19(2)1 of the law that persons who have registered as performing economic activity but do not carry out any economic activities in the taxation year should pay a tax of EUR 50. The provisions that concerned reliefs applied to persons on childcare leave have been clarified. It is specified that the relief will apply only to those persons who care for a child up to 2 years old.
Refund of amounts paid in error
To date, amounts paid into the budget in error could be retrieved only in three years. Going forward it will be possible to apply for refund of amounts paid in error for an unlimited period of time and the SRS will refund these amounts within one month from the date of application. Amounts paid in error are all amounts that were paid in excess of what is specified in the submitted declaration, including monthly, quarterly or annual declarations. Overpaid taxes will be refunded according to the current procedure, i.e. within 3 months from the date of submission of the annual declaration and verification of it. It will be possible to submit the summary declaration three years from the end of the taxation period.
Tax application to capital gains
To date it was laid down in the law that in case according to initial calculations the capital gain of a single asset in a month during the taxation year was negative but in another month it was positive due to disposal of another asset then the positive capital gain was subject to personal income tax despite the fact that the total capital gain in the taxation year was negative. Tax payers could receive overpaid tax amounts only after submitting summary declarations, i.e. from 1 March of the following year. Whereas if the payer had not paid the tax the SRS would calculate a delay money and a fine despite the fact that tax should not be paid according to the summary declaration. It is specified in the amendments that in case income from capital disposal in one month is negative but it is positive in another month from the disposal of other capital then the tax calculation should take into account the negative values calculated earlier in the taxation year. Where the total of the negative and positive values of capital gain is nil or negative the payer will no longer be required to calculate and pay tax and the SRS will not be authorised to charge delay money or a fine.
A new object of tax has been introduced, “state interactive lotteries” and the license for it can be obtained for a duty of EUR 10 000 for each calendar year.
The draft amendments propose changes to Section 7 of the law, i.e. changes in the procedure for calculating tax on non-interactive lotteries with a prize fund exceeding 60% of income from ticket sales and a separate procedure for tax calculations is introduced for interactive lotteries.
To date a tax of 10% from the ticket sales was applied to these lotteries and instant lotteries then going forward:
- if the prize fund prescribed by lottery regulations is up to 60% of the income from ticket sales (including for instant lotteries) then the tax rate remains as it is now, i.e. 10% from ticket sales;
- if the prize fund prescribed by lottery regulations (including instant lotteries) exceeds 60% of the income from ticket sales then the tax will be 10% of the income from ticket sales less calculated prizes to be paid out;
- for interactive lotteries (cash, property, number lotteries and instant lotteries presented by means of the Internet, telephone, radio, television or other type of electronic communications) the tax will be 10% from net income which is income from ticket sales less actual prizes paid out.
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