Lithuania ranks 6th in the 2021 International Tax Competitiveness Index presented by the US-based Tax Foundation. Estonia maintains the top ranking and the neighboring Latvia comes second, followed by New Zealand, Switzerland and Luxembourg.
“The Estonian example shows that low and neutral taxes increase the competitiveness of a tax system. Lithuania’s tax system is undermined by multiple exemptions, overly complicated rules and tax progressivity introduced in 2018,” LFMI President Elena Leontjeva commented on the results of the tax competitiveness ranking.
Lithuania ranks 22nd by the complexity of the corporate income tax (CIT) regime. The Lithuanian government is now debating reforming the tax system and one of the reform alternatives under consideration is the Estonian model which taxes only distributed profit while retained and reinvested profits remain tax-free. Latvia adopted this tax model in 2018.
Lithuania’s corporate income tax rate stands at 15% and is one of the lowest among OECD countries. Another 20-percent tax rate is charged on distributed profits. So the effective tax rate comes to 27.75%, leaving Lithuania way behind Estonia and Latvia who apply only 20 percent on distributed profits.
“Lithuania allows corporate income tax breaks for certain types of investment and R&D projects but they involve onerous criteria and costly burdensome bureaucracy so that the tax incentives are accessible to a negligible proportion of companies. Statistics show that a meagre one percent of Lithuanian companies benefit from such tax incentives,” Elena Leontjeva notes.
“To achieve a breakthrough in economic growth, all companies should be allowed to invest their earned profits without an excessive burden of taxes and bureaucracy. This would mean more investment in business development, technological upgrading, the green deal, labor productivity, and new jobs.”
The existing corporate tax incentives for R&D draw artificial boundaries where and how investments can be made. In many cases, tax incentives put businesses at risk for non-compliance with overly bureaucratic requirements and ambiguous rules.
The international tax competitiveness ranking is a good reminder that there is a pressing need to fundamentally improve the country’s corporate tax model.
Consumption taxes are also dragging down Lithuania’s ranking. The value added tax was “temporarily” raised from 18 to 21 percent after the 2008 financial crisis, where it stands until this very day.
It is also subject to multiple distortionary exemptions. Lithuania ranks 20th by the rate of consumption taxes, 32nd by consumption tax revenues, and 19th by their complexity. This puts Lithuania well below the OECD average in the category of consumption taxes.
International Tax Competitiveness Index 2021 can be found here