The complexity of the advance payment of corporate income tax (CIT) creates administrative burdens for businesses and hinders the path to greater competitiveness.
To ensure the stability of the state budget and higher tax revenue collection, the CIT regime was complemented by an advance CIT in the early years of the restoration of Lithuania’s independence. Companies pay it before profits are earned, thus crediting the State.
Until September 15, businesses can change the calculation method for the advance payment of CIT to be based either on the actual results of the previous year or the projected results of the current year. Each method carries a risk of interest penalty. Still, the amount of interest penalty the businesses will be charged for previously unpaid CIT will depend on their performance and forecasting ability.
Companies are required to submit an advance CIT return once a year by 15 March of the current year. They must do this even if they are making a loss.
According to the Lithuanian State Tax Authorities, 13,000 companies have paid €3.5 million in late payment penalties for 2022. The average cost per company was around €260. This amount could result either from an underestimation of CIT or the fact that CIT paid in advance based on the previous year’s results turned out to be higher in reality than in the previous year.
With the economic downturn breathing down their necks, companies often avoid paying advance CIT based on amounts paid in previous years because they expect a reduction in revenue or even a loss. In this case, they choose to meet their advance CIT liability based on their forecast results for the current year.
Forecasting can be difficult. Although companies do so, it is impossible to predict all the factors that will affect the overall economy and the specific activities of a company. Ahead of the deadline for filing the 2022 advance CIT return, the Bank of Lithuania predicted that inflation would reach 5.1%, but by the end of the year, it had jumped to almost 19%. The rise in the producer price index outpaced consumer prices throughout the year, with an annual change of 26%.
All this shows that even the institutions with the most robust analytical capacities have failed to forecast macroeconomic indicators, even though the latter are dependent on the performance of these institutions themselves. Therefore, it is unreasonable and unfair to expect accurate forecasts from companies with far less capacity and resources than organisations exclusively dedicated to this activity. Nor is it fair to penalize them with interest for failing to predict accurate amounts of CIT.
It imposes a significant administrative burden on companies to calculate, forecast and recalculate tax and change their forecasts and how they calculate the tax itself. There are even cases where companies are forced to borrow because there is insufficient cash to pay the tax. Moreover, it reduces their resilience to future uncertainties.
The principles of statutory taxation state that the administration of taxes should not adversely affect the allocation and use of resources in the economy and certainly should not cost more than the taxes themselves. At this stage, the tax administration costs could be used for business expansion, investment in new jobs and employee welfare. In other words, a company can focus all its human and financial resources on generating real income instead of forecasting figures for an advance CIT return.
Advance CIT also comes at a cost for public authorities and civil servants: it has to be calculated and collected, interest penalties have to be monitored, and questions and complaints must be answered. All this diverts not only the attention of the authorities but also resources away from their use for the most important national priorities.
The introduction of a distributed CIT model would significantly improve the situation. Taxing profits at the point of their distribution would ensure the company has cash to pay the tax. Reinvesting profits without incurring a tax liability would reduce the need for companies to borrow, make them more resilient to external shocks and contribute to the development of the national economy. This would be a significant boost in achieving the country’s competitiveness objectives as set out in the strategies for progress.