SEB: The tax systems of the Baltic countries are converging

Major amendments will take effect in the Latvian and Estonian tax systems next year and a number of corrections will also take effect in Lithuania. At the same time, all of these amendments are moving in the same direction: bigger progression, new solutions for start-up companies and the increase of excise duty rate.

“The tax systems are very similar and the countries are trying to copy each other’s best solutions. Discussions about the increase of progression of the tax system are taking place in all three countries. However, none of the Baltic countries are ready for full-scale progressive tax treatment. All of the three Baltic countries are looking for opportunities to maximise economic growth by shaping the tax system according to the needs of the companies. An effective and convenient tax system is the key element of every country for attracting investors,” says Dainis Gašpuitis, macro-economy expert of SEB Latvia.

Therefore, from the point of view of foreign investors, the Baltic countries are a rather homogeneous area. Every country has its own advantages in the chosen areas, but their economic problems are very similar: ageing society, available workforce and productivity.

In addition, the overheating of the economy is topical in all three countries. Senior Analyst of SEB Lithuania Tadas Povilauskas says: “Even if the official indicators do not refer to overheating, all of the three countries already have the familiar symptoms coming forth again. We are again seeing simultaneous fast growth of wages and inflation. At the same time, the loans and real estate market is not yet showing any deviations.”

Per capita GDP is highest in Estonia, purchasing power is best in Lithuania

When it comes to per capita GDP, Estonia is still leading amongst all Baltic countries. However, Lithuania has managed to surpass Estonia in terms of purchasing power. “Estonian per capita GDP is 22% higher than in Lithuania and 27% higher than in Latvia. If we assumed that the annual economic growth of Latvia and Lithuania is 3% and Estonian GDP were to grow just 2%, Lithuania would surpass Estonia in the year 2031 and Latvia in 2038. In reality, the growth rate of the three countries will be very similar, “ believes the economist of SEB Estonia Mihkel Nestor.

The problems of the Baltic countries are also similar in other areas. For example, the reformation of education systems with modern content and the alignment of the decreasing number of children with the number of schools and teachers. Economists agree that all three Baltic countries have to think about the import of optional foreign workforce because the absence of people could soon become a restricting factor for economic growth.

Wage growth is attracting Estonians to stay in the homeland

It seems that Estonia has reached a higher wage level (approximately 1000 euros after taxes) in which people are inclining towards staying in the homeland rather than leaving for other countries to earn a higher wage. But emigration from Estonia has also been stopped by the tight connections with Finland, since the geographical closeness has made it possible for people to work in Finland while living in Estonia. In addition, the economic stagnation in Finland has limited the number of existing free work positions in the past few years.

Estonia has been able to shape the reputation of Estonia as an IT flagship by exhibiting their success stories internationally. A more thorough economic overview shows that Latvia and Lithuania are not far behind. If they were able to attract one big global technology company, either one of them could reach the same level as Estonia. Estonian experience also shows that the orders by the country could become a great way to give the IT industry a push.

For more information:

Evelin Allas
Communications Manager
Marketing and Communications Division
SEB

Phone +372 665 5649
Mobile +372 511 1718
Address Tornimäe 2, 15010 Tallinn
E-mail evelin.allas@seb.ee
www.seb.ee

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