Taxation in Lithuania

Taxation
An aspect of fiscal policy
Policies Government revenue Tax revenue Non-tax revenue Tax law Tax bracket Tax threshold Exemption Credit Deduction Tax shift Tax cut Tax holiday Tax advantage Tax incentive Tax reform Tax harmonization Tax competition Double taxation Representation Unions Medical savings account Tax, tariff and trade
Economics Price effect Excess burden Tax incidence Laffer curve Optimal tax Theory Optimal capital income taxation
Collection Revenue service Revenue stamp Tax assessment Taxable income Tax lien Tax refund Tax shield Tax residence Tax preparation Tax investigation Tax shelter Private tax collection Tax farming
Noncompliance Tax avoidance Tax evasion Tax resistance Tax haven Smuggling Black market Transfer mispricing Unreported employment Tax shelter
Distribution Tax rate Progressive Regressive Proportional
Types Direct Indirect Per unit Ad valorem In rem Capital gains Carbon Consumption Dividend Ecotax Excise Fuel Georgist Gift Gross receipts Income Inheritance (estate) Land value Payroll Pigovian Property Sales Sin Single Stamp Steering Turnover Value-added (VAT) Corporate profit Excess profits Windfall profits Negative (income) Flat Wealth
International Financial transaction tax Currency transaction tax Tobin tax Spahn tax Tax equalization Tax treaty Permanent establishment Transfer pricing European Union FTT
Trade Custom Duty Tariff Import Export Tariff war Free trade Free trade zone Trade agreement
Religious Church tax Eight per thousand Teind Tithe Fiscus Judaicus Leibzoll Temple tax Tolerance tax Jizya Kharaj Khums Nisab Zakat
By country List of countries by tax rates Tax revenues as %GDP Albania Algeria Argentina Australia Azerbaijan Bangladesh Bhutan Bulgaria Canada China Colombia France Germany Greece Iceland India Indonesia Iran Ireland Israel Italy Japan Kazakhstan Lithuania Malta Namibia Netherlands New Zealand Norway Pakistan Palestinian territories Peru Philippines Poland Russia Singapore South Africa Sweden Switzerland Tanzania United Kingdom United States Uruguay

Taxes in Lithuania are levied by the central and the local governments. Most important revenue sources include the value added tax, personal income tax, excise tax and profit tax, which are all applied on the central level. In addition, social security contributions are collected in a social security fund, outside the national budget. Total tax revenues in Lithuania, including social security contributions, was only 27.5% of GDP in 2012, the lowest in the European Union.

History of taxation in Lithuania

Before the 16th century, finances in the Grand Duchy of Lithuania were based on barter. The first taxes (dėkla and mezliava) were paid in farm products. During the reign of Kęstutis, the first cash taxes were introduced, although most taxes were still paid in goods (e.g., wheat, cattle, horses).

In the Polish–Lithuanian Commonwealth, a treasury court was established in 1591, followed by the treasury tribunal in 1613 that presided over tax cases until 1764. The taxes were set by Sejm. Taxes introduced in the 17th and 18th centuries included padūmė (tax on holdings), hiberna (tax for quartering), kvarta (tax on government estates) and pagalvė (pillow tax, payable per individual).^[1]

After the partitions of the Commonwealthm the taxation system in Lithuania was subordinated to the respective partitioning powers (Russian Empire in most of the territory of modern Lithuania). Taxes collected during this period were mostly on land, rents, trade and manufacture.

Taxes were again collected by the newly independent Lithuanian state after 1918. The Law on Taxes was introduces on 23 January 1919, followed by a number of additional tax laws. Taxes introduced included direct taxes (e.g., land tax, real estate tax, business tax, inheritance tax) and indirect taxes (e.g., excise taxes on drinks, tobacco, precious metals, as well as tariffs).

Under the Soviet rule, the Lithuanian financial system, including taxes, was integrated into the Soviet one. The personal income tax was progressive and ranged from 0.35 to 13 percent on income above the non-taxable amount. Local taxes were also collected: house and land ownership tax, as well as vehicle ownership tax.

The modern tax system in Lithuania was gradually reestablished in the early 1990s with the introduction profit and personal income taxes in 1990, land tax in 1992 and the Law on Tax Administration in 1995, among many other tax laws and rulings.

Modern tax system

The modern tax system in Lithuania is based on the Constitution of Lithuania. Articles 65 and 127 of the constitution enshrine two key tenets of the tax system: taxes can only be introduced by law and only Seimas can introduce tax laws. Key tax laws in Lithuania include Law on Tax Administration, Law on Customs and the individual laws for specific taxes.^[2] The tax practice is also affected by international treaties, including numerous bilateral tax treaties for the Avoidance of Double Taxation to which Lithuania is part. As part of the European Union, taxation system in Lithuania is also heavily affected by European rules and regulations, particularly in the areas of VAT and tariffs.

The main principles of tax administration in Lithuania, as defined by law, are:

• Equality – all tax payers shall be treated equally before law.
• Fairness – the tax administrator has to calculate the tax due in a fair manner.
• Universal applicability – all tax payers have to pay taxes in accordance with law and in a timely manner.
• Clarity – tax obligations and the process for settling tax obligations has to be clearly and unambiguously defined by law and associated rules.
• Substance over form – transactions and relations shall be assessed on their actual content and not on their formal expression.

Tax revenue in the Lithuanian national budget by type of tax, 2013

All taxes in Lithuania are administered by the State Tax Inspectorate, except tariffs that are administered by the Customs. The Customs also administer the part of value added tax and excise duties where they relate to goods imported and exported. Some tax administration functions are also performed by the Ministry of Environment Protection and the Ministry of Agriculture.

The most important taxes collected in Lithuania include the value added tax, personal income tax, excise tax and profit tax, which together accounted for 94% of tax revenue or 66% of total revenue in the national budget (including municipal budgets) in 2013.^[3] All of these taxes are collected in the state budget, although a part of the personal income taxes collected from individuals are allocated to the municipality where that individual resides. The rules for this allocation are approved annually. Taxes on property are allocated fully to municipal budgets.

Lithuania redistributes a relatively small part of its GDP through taxation. Revenue from taxes and social contributions in Lithuania stood at 27.5% of GDP in 2012, the lowest in Europe.^[4] Lithuania also exhibits some of the lowest tax rates on corporate profits, capital and wealth in the European Union, which has led to the country being described as a low-tax economy.^[5]

Total receipts from taxes and social contributions as % of GDP

Taxes levied

Personal income tax

Personal income taxes are levied on residents and non-residents. Residents are taxed on their worldwide income, including income from employment, self-employment, investment income and capital gains. Non-residents may be taxed on certain types of income deemed to originate in Lithuania, including employment income, interest, income from distributed profit and income arising from real estate or other property. Relief from double taxation is available in some cases.^[6]

Most types of the income is taxed at a rate of 15% (basic deduction is available for lower levels of employment income). Some types income is taxed at a lower rate of 5%. A separate health insurance contribution of 9% (6% payable by the employee and 3% by the employer, although exceptions exist) is levied on some of the income, including income from employment.

Lithuanian personal income tax system is classified as a case of flat tax,^[7] although the existence of basic deduction on salaries (Lithuanian: neapmokestinamasis pajamų dydis) means that the effective tax rate will depend on the level of income. As of 2015, the size of the basic deduction depends on the basic salary, the number of children, and the level of disability.^[8]

Since at least 2002, discussions have taken place to implement progressive taxation of income in Lithuania with the aim to reduce inequality. However, as of 2014, every proposal to implement progressive taxation has failed. The majority of proposals has been put forward by members of the Order and Justice Party and the Social Democratic Party. Despite both parties being part of the ruling coalition since 2012, Prime Minister Algirdas Butkevičius indicated that it was not possible to introduce progressive taxation due to the level of income being too low and the negative effects it would have on budget revenue.^[9] Butkevičius also reiterated that the Lithuanian system could already be seen as progressive due to the application of non-taxable income.^[10]

Social security contributions

Contributions to the social security fund are due on income from employment. Contributions are withheld from the salary at a rate of 3% (or 4%, if the employee has chosen to make supplementary contributions in the pension system). Additional contributions are paid by the employer at a rate ranging from 27.98% to 29.6%, depending on the type of employer.^[6] People other than employees, including the self-employed, sport persons, artists and farmers, may be subject to social security contributions at different rates.

Social security contributions are paid on the entire income from labor. Introducing a "ceiling" on social security contributions has been proposed on several occasions, but has not been agreed upon, as of 2015. The "ceiling" would limit the contribution to the social security fund in a similar way to how pension and other payouts from the fund are already limited.^[11][12]

Profit tax

Profit tax (or corporate income tax) is levied on Lithuanian companies, companies operating in Lithuania through a permanent establishment, and non-resident companies. Lithuanian companies are taxed on their worldwide income, allowing for deduction for income generated through permanent establishments in other countries in accordance with international treaties. Companies operating in Lithuania through a permanent establishment are taxed on the profit attributed to such permanent establishment. Non-resident companies are taxed on certain income that is considered to originate in Lithuania, such as dividends, interest and royalties, although exceptions exist.^[13]

Most companies are taxed at a rate of 15%. The rate of 10% is applied on the interest and royalty income paid to non-resident companies. The rate of 5% is applied on the profit of small companies and agricultural enterprises, as defined by law. The rate of 0% is applied on the profit generated by social enterprises and the business profit of non-profit enterprises up to a threshold of 25,000 litas (2014). Companies engaged in shipping or related activities may be taxed on a different basis. Participation exemption applies to dividend paid/received from closely held companies and capital gains from shares of closely held companies, as defined by law.

Value added tax

The value added tax (or VAT) is levied on goods and services that are subject to VAT according to law. The VAT in Lithuania is part of the European Union value added tax system.

The standard VAT rate in Lithuania is 21%. Certain goods and services are subject to reduced VAT rates of 9% (e.g., most books, periodicals and passenger transportation services), 5% (e.g., certain pharmaceutical and medical goods, assistance provided to the handicapped) and 0% (e.g., international transportation).^[14] Certain goods and services are exempt from VAT (e.g., financial services).^[15]

Excise tax

Excise taxes in Lithuania are applied on imported or locally manufactured and sold products:

• Alcoholic beverages and intermediate alcohol products
• Tobacco products
• Energy products, including vehicle fuel, heating fuel and electricity^[16]

Excise tax rates are set by law and have changed frequently, driven by the minimum tax rates required by European Union, as well as local budgetary and public interest considerations, as the tax contributes significantly to the national budget, while many of the products taxed (i.e., alcohol and tobacco products) have negative effects on public health.

As of 2015, the excise tax rates on tobacco products were due to meet the minimum rates required by the European Union by 2018.^[17] The relatively low rates in Lithuania are mostly driven by the presence of a significant black market for cigarettes, which are illegally imported from Russia and Belarus.

At the same time, the excise taxes on alcohol products are substantially higher than the minimum levels required by European Union, exceeding them already in 2004, especially for spirits. The increases have been driven by budgetary and public health considerations (alcohol consumption in Lithuania is among the highest in Europe),^[18] but have attracted criticism for contributing to the widespread black market. Beer, on the other hand, is relatively mildly taxed compared to other European countries.^[19]

The black market for goods subject to excise tax has been cited as the main reason for the excise taxes in Lithuania failing to meet either budgetary or public health goals. The black market benefits from close proximity to Russia and Belarus, widespread tolerance among the population and the prices of legally available goods being high relative to income. Black market sales are estimated to constitute 33% of all sales for spirits (although only 4–5% for low-alcohol beverages that enjoy lower excise tax rates), 35% for cigarettes and 15 to 20% for vehicle fuel. Therefore, further increasing excise taxes beyond the minimum level set by European Union has been criticized as counter-productive.^[19]

Other taxes

The Law on Tax Administration sets the list of 25 taxes (as of 2015) levied in Lithuania. Other than the taxes outlined above, they include taxes on real estate and land, natural resources, pollution, inheritance, lotteries and gambling, as well as fees for services provided by the government (e.g., registration of industrial property) and certain taxes in the sugar industry.

References