Finance

After the country’s economic situation had worsened, problems and shortcomings of the tax system of Lithuania came to light. At the present time enterprises are faced not only with faint possibilities of borrowing from banks, growing debts that enterprises owe one another and other problems related to a poor economic situation but also with the shortcomings of the tax system. The most severe difficulties are the obligation to pay the advance profits tax, and delay to refund the VAT overpayment, as well as absence of registering debts between the state and business. Seeking to help business survive during the current economic crisis, elimination of these tax problems as well as introduction of the zero tariff rate of profits tax on reinvested profit should be the main tool to encourage business.

The necessity to legalise registration of debts between the state and business became obvious at the end of the past year when debts of the public sector to enterprises and the shortage of working capital that resulted from it prevented enterprises from fulfilling their duty of paying taxes. In this situation two types of creditors – the state or enterprises have different debt repayment conditions, as well as different methods of calculating fines.

In case budgetary income is not collected, budgetary funds are begun to be allocated according to the priorities approved by the Resolution of the Government of the Republic of Lithuania in October. According to this Resolution, property liabilities related to the state debt, as well as payments to the EU budget, are considered to the priority; the use of goods and services, expenses on acquiring tangible and intangible assets come at the end of the list of priorities. However, if the state debt comes first, why there should not be state arrears there either? Though these are liabilities of different types (the state owes some enterprises because the latter lent it money, and the state delayed paying others for work performed or services provided), all creditors should be treated equally.

The state calculates fines and imposes penalties on the enterprise that fails to pay taxes; the enterprise has no such levers in its arsenal. It can appeal to court, however the funds, which it would receive for non-fulfilment of its liabilities would account for 5 per cent of annual interest, and the amount of fines established by Order of the Minister of Finance is as large as 0.04 per cent for every delayed day. This means that if the state owes LTL one million to an enterprise it would pay the enterprise LTL 50 thousand, and the enterprise that owes the same amount to the state for a year would pay it a fine of as much as LTL 146 thousand.

Unlike the case with private debtors, it would be difficult to negotiate the debt repayment terms or other sanctions (e.g. arrest of the account) with the state. One enterprise, to which several municipalities owed large amounts of money and which could not pay taxes on time because of that, tried to negotiate so that the tax administrator should lift arrest of the enterprise’s account. However, after the agreement to lift arrest had been reached the enterprise was sent another decision made prior to the negotiations “to pay taxes in the compulsory order” in which a large amount of fine was calculated. This creates the possibility to drive enterprises into bankruptcy and it is necessary to eliminate it without delay. The first step has already been made – the Seimas Committees are considering the draft resolution On Registering Debts between the State and Business; it is necessary to adopt it as soon as possible and to start preparing amendments of the legal acts regulating them. A simple mechanism (perhaps even an automatic one) to exactly register these debts so that enterprises should not have to additionally negotiate with the tax administrator on permission to apply that registration and other conditions is to be planned. A transparent registering procedure would ensure that all enterprises should be subject to equal conditions. On the other hand, having legalised the possibility to treat the state or municipal debts as payments of taxes, the possibility of indebted municipalities to announce new public procurements must be restricted seeking to avoid abusing the new procedure.

Another problem that hits the cash flows of enterprises is the advance profits tax. Methodology of calculating it is adapted to the period of the economic growth; however during the time of the economic crisis it can become the last drop driving enterprises into bankruptcy. At the beginning of every tax period enterprises can choose whether to pay the advance profits tax according to the performance results of the previous year or according to the forecasted amount of the profits tax of the payment period. Few enterprises chose the second variant because it punishes enterprises for inaccurate forecasting: if the amount of the advance profits tax forecasted and paid by the enterprise accounts for less than 80 per cent of the actual amount of the annual profits tax, a fine is calculated from the advance profits tax that was not paid every quarter. Having chosen this variant the enterprise would have to allocate its limited recourses to constant forecasting of profit seeking to reduce the possibility of inaccurate forecasting and payment of fines resulting from it. It is clear that during the economic crisis an enterprise’s recourses must be allocated to its survival rather than to accurate forecasting of payments to the state budget. Hence, the majority of enterprises pay the advance profits tax according to the declared performance results of the previous year. This variant is favourable when the country’s economy is growing. During the economic crisis when profitability cannot be forecasted, enterprises are short of working capital and there are almost no possibilities to borrow, payment of the advance profits tax according to the performance results of the previous year might become the death sentence to most enterprises. During the first three quarters of 2009 hardly any enterprise will be able to boast the same profit as in 2007 according to which the payment is calculated. One of the proposals, which the Lithuanian Free Market Institute put forward to the Plan of Measures of the Government Programme was to abolish payment of the advance profits tax (at least for small enterprises). It should be one of the measures to help avoid mass bankrupts of enterprises.

Delaying to refund the VAT overpayment reduces working capital of enterprises; hence, this problem of the tax system also has a negative effect on the financial standing of enterprises. According to the Law on Tax Administration, the tax administrator has the right to verify the validity of the request of a taxpayer to refund tax overpayment; he/she can also begin tax verification. In case of a shortage of funds to refund the VAT overpayments, the tax administrator can begin many tax verifications. The main drawback of this system is that upon completing tax verification, even if the enterprise’s request was valid, no fines will be paid to it on the VAT that was refunded following the verification. As we know, tax verification at an enterprise may last 90 days and the verification period at the Tax Inspectorate is unlimited. Hence, mass delay in refunding the VAT overpayment is the possibility for the state to receive a credit without paying any interest. However, when making use of this source of crediting, the state abuses the trust of its people; in delaying to refund VAT for a long time the enterprise might disappear. Therefore it is necessary to supplement the Law on Tax Administration with the provision establishing that if after tax verification it is established that the request of a taxpayer to have the refund tax overpayment was valid, the Tax Administrator must refund the overpayment together with the calculated fine (calculated at least from the 30th day of receipt of the request, that is, from the day of refunding the overpaid amount). If fine were started to be calculated, mutual interest to refund the VAT overpayment as soon as possible would appear and the mechanism of refunding VAT would become more balanced.

Abolition of the profits tax on undistributed profits or the zero tariff rates of reinvested profit must be the main measure to encourage investment, especially at the time of the economic crisis. The Lithuanian Free Market Institute also put forward such a proposal to the Plan of Measures of the Government Programme. The essence of this profits tax reform is as follows: only the distributed profits (dividends) are taxed and the funds left in the enterprise are not taxed.

A similar model was already started to be applied in Lithuania: beginning with 1995 a lower than 10 per cent tariff rate of reinvested profits of all enterprises was applied, and from 1997 to 2002 the zero tariff rate of profits tax was applied to reinvestments. Non-taxing reinvested profits laid the foundations for the economic growth in Lithuania. The model that was applied differed from the one being proposed in that earlier only certain investments were untaxed, thus, accounting related to the calculation of the profits tax base remained. The reform being proposed would abolish main drawbacks of the profits tax – the subjective tax base, high expenses related to the calculation of the tax base, which are regressive, that is, the smaller the enterprise, the relatively higher calculation expenses are. The zero tariff rate of reinvested profits would increase working capital of enterprises, encourage them to invest that capital, would help enterprises survive during this economic crisis. Hence, measures to improve business do exist, however, it is necessary to make simple common sense decisions to implement them.