I am grateful for your attention and for your participation in this conference. From my own practical experience in the areas of business, management and organisation, I know that taxes is an issue frequently discussed in economics. We can find many dissenting opinions as to what and how much shall be subject to taxation, what rate shall be fixed, how to improve tax collection efficiency? I can assure you that the majority of Lithuanian businessmen and company managers do not raise the issue of the need to pay taxes. What needs to be discussed, though, is the question on how to improve tax collection efficiency and the disbursement of the collected revenues for the solution of problems in the society, for funding the targeted aims, and for forecasting the need for such financial resources.
As a representative of the MG Baltic Concern UAB I would first of all like to present you with some facts and figures about the concern. The concern unites 29 companies. The consolidated annual turnover of these companies in 2001 was to the tune of 512 million litas. According to this figure, the Verslo žinios newspaper ranked us as the 10th group of companies in Lithuania. This year the planned consolidated turnover is to reach 560 mln. litas.
In 2001, the combined investments of the companies of the MG Baltic concern into business development and real estate exceeded 25 mln. litas, while the planned investments for 2002 will be above 28 mln. litas. A total of 1920 members of staff work for the companies of the concern.
In 2001, the companies of the concern paid over 54 million litas in taxes to the state budget, which makes up 5.48 % of the Vilnius city budget.
Businessmen and company managers are mostly concerned that the society, through the undergoing democratic processes, such as election of the government and delegation of powers to represent interests of civic groups, should adopt decisions and provide a legal basis for them in the form of legislative norms ensuring the overall compliance. Indeed, businessmen and managers feel the need to work in a stable and good environment guaranteeing the freedom of initiative, enshrining the principles of property immunity, equal opportunities, and neutrality of taxes.
Therefore, I can dare say that the larger majority of businessmen and managers based in Lithuania clearly recognise the importance of taxes for the stability and security of their own businesses and are conscious payers of all applicable taxes. Since this part of the public is characteristic of large civic activity and often expresses its views on various fields of life, their views on the efficiency of utilisation of collected taxes as well as the overall tax burden are presented as an advocacy of tax avoidance. Meanwhile, businessmen clearly state on instances illustrating inefficient utilisation of the state’s financial resources and maintain that as regards problems felt in many areas of public life the state should take a bold approach allowing the public itself, i.e. its active part, to take care of a number of topical issues leaving within its competence only such areas which have been truly delegated to it by the public, such as: establishment of the rules acceptable to the public and the efficient enforcement and monitoring of the same, as well as duly amendments to these rules to reflect the current needs of the real contemporary life.
I believe that a state where the above said principles are put in practice is attractive both to internal and external investors since such a state liberates and respects the principle of equal opportunities in all areas of economic life, which secures a good competitive position in relation to its neighbours. All this may be summarised in a few words – a mature, stable democracy with principles of the functioning market economy where there is no possibility for any surprise, revolution or stresses.
In the Republic of Lithuania, the total amount re-distributed through the aggregate national budget amounts to 29.4 % of the gross domestic product (GDP). Quite often the current state leaders underline that, compared to other states, this ratio is insufficient. This, in its turn, justifies a number of measures being sought on how to introduce new taxes or increase volumes of tax revenues by means of artificially increasing the effective assessment basis.
Such decisions often contradict statements made by political parties failing to deliver on the promises in their electoral programmes not to increase the effective tax burden in respect of natural and legal persons. In real life, however, these processes take an opposite course resulting in the increase of the tax burden. Recently we have been witnessing the evolution of the tax computation procedure into a more complex system, or an instance of decreasing a tax rate, on one hand, and raising the number of taxable composite elements of one economic activity, on the other hand, which leaves the impact of taxation all the same.
Often such steps are argued by statements on the shortage of financial resources for the health care system, social insurance or education. I believe the underlying problem is not in the shortage of funds, but rather in their inefficient utilisation, i.e. in the scope to do what the state should not do in principle, namely to involve into a concrete business activity. Moreover, these plans are tried to be implemented by public servants recruited to perform public administration functions who, under the disguise of acting on behalf of the state, conceal their inefficient public administration activities and try to pursue their personal interests by means of exercising the right to distribute the revenues paid by taxpayers. At present, the most illustrative example of such a system is the system of health and social insurance.
And yet, in contrast to the given example, we may cite a few other examples which are much more logic and, most importantly, bear concrete results, clearly benefiting from right decisions of the state.
In 1997, the amendments to the Law on Corporate Income Tax adopted provide for an income tax exemption in respect of corporate income invested by legal persons in key measures, i.e. in respect of income turned into capital participating in the process of value-added development. Similarly, later amendments to the same law provided for a possibility to pay corporate income tax during the term of useful utilisation of these measures. Evidently, such decisions created fairly attractive measures to the investment process, mastering of new technologies, creation of new jobs, allowing for a more resolute approach to long-term investments ensuring timely technological upgrading, offering goods or services of a higher quality to the consumers, avoiding a situation failing any explanation when companies in their profit and loss statement show the profit generated, while the cash flows statement reports a shortage of financial resources for technological upgrade and sometimes even to pay taxes.
By way of example, I could mention one of the companies belonging to the MG Baltic UAB concern – Apranga APB. During the effective period of the said regulatory norms, the company invested 18.9 million litas of the earned profit into the expansion of its activities. In respect of this sum of investments, the company applied a zero taxation rate; had there not been the said law amendment, the then effective income tax rates would have resulted in 5.3 million litas which the company must have paid in corporate income tax. Consequently, we may state that the state has rendered support to the company’s development equal to this sum. What are the results of this support?
In 1997 the Apranga company held a chain of 9 retail shops, in 2002 this chain has grown to include 19 shops, or has increased by 111%. In 1997 the corporate sales amounted to 33.1 million litas, in 2002 the respective figure is expected to reach 75 million or increase by 127%.
In 1997 the company employed 208 members of staff, in 2002 the number of employees increased to 272, or by 31%. In 1997, the average wages of a production staff was 893 Lt, while in 2001 it reached a sum of 1399 litas, or increased by 57%. For 1996, under the laws and other legal acts the company calculated and paid 7.76 million litas in taxes. For 2001 the company calculated and paid to the state budget 13.2 million litas in taxes, which is 71% more than in 1996. Out of this sum 54% more taxes were paid in private income tax, 111% - in value added tax, 7669% in real estate tax, 105% in social insurance contributions, 95% in road tax. During nine months of 2002 alone, Apranga APB computed and paid 11.8 million litas in taxes under the applicable laws and other legal acts.
This is one of many examples when an attractive policy on investments taxation followed by the state creates favourable conditions consolidating and expanding the position of legal businesses and pursuing an efficient competition policy against various business formations avoiding taxes. I believe that we can find more than one example of such type in Lithuania. Hence, we may claim that during the said period the majority of all legally operating Lithuanian companies pursuing a long-term strategy were growing successfully, creating new jobs, contributing towards the growth of the Lithuanian gross domestic product and improvement of the macroeconomic indicators.
In 2002, the consideration of the decision to abolish this tax relief favourable to businesses and stimulating investments was based on an argument that such conditions encourage accumulation of large production facilities and new technologies which are not utilised efficiently. We can oppose to this view with the help of factual arguments that this is not by far the most pressing problem. For more than 10 years various tax relieves have been applied in the Republic of Lithuania to support the banking sector. This support has turned the Lithuanian banking system into an area attractive to investments, resulting in investments by major world banks into the Lithuanian banking system. This process has had an impact on a plentiful supply of financial resources in Lithuania, accounting for the lowest interest rates in the whole Baltic region. This, in turn, has had an effect on investment solutions into the real estate market, particularly in solving the housing problem of the population. We have been witnessing a steep rise in the construction volumes ensuring the creation of new jobs. I believe this process has its impact on the goods and services supply sector. Over 9 months this year, the retail trade growth reached 8%, including an increase of 14% of car sales. It took more than a decade to reap the results of this taxation policy. These are indeed outstanding figures, and it is a great pity that, due to the abolition of tax relieves, the industrial sector will not be able to demonstrate similar results in the future. In my deep understanding, there is no such problem of efficient utilisation of modern production facilities or technologies on account of a qualitative surplus of the same. We should look for the reasons in companies’ managerial solutions, operational strategies drawn up by the managers, and tactical plans. It has to be admitted that not always and not all businessmen and managers are equally good at matching their chances against their targets. Therefore, it is very important to set in motion the process of change in ownership that would be free from additional taxes and would ensure its timely course. After all, the facts speak for themselves – in Lithuania there is not a single major bank formed on the basis of the national capital, various foreign investment funds are the major donors of key industrial companies. Indeed, provision of tax relieves to investments into long-term industrial capital, transfer of ownership – alongside with management and responsibility, prevention of additional tax burden to be shouldered by the labour force or maintenance costs will determine whether Lithuania will be truly capable of competing with other countries not only in the possibility to consume, but also to produce and sell.
Over 2001 – 2002, a number of tax related laws have been amended. The key motive behind all these amendments is the future membership of the European Union and a logical requirement to harmonise the existing legal acts, including those regulating commercial activities and taxes. This may be seen as a good opportunity to take over good practice and apply it to the Lithuanian conditions by keeping everything positive we have managed to create ourselves.
Therefore, the question is whether the harmonisation of tax related legal acts with the EU legal acts has helped to make our company more attractive to investments, have we seen to a more efficient labour restitution process or made our country more competitive in the future Europe? Are we trying to prove that we are equal competitors in the process of reasoning and developing the welfare strategy for our society?
Unfortunately, in terms of the amendments adopted not all of these questions offer positive answers. It is a pity to see that state policy makers were not even targeting these objectives during the legislative amendment process. At present the European Union requires the harmonisation of indirect taxes only, while the rates of direct taxes and fixing of the assessment basis are still in our own hands. I do not know why our country has opted for a complex system of tax computation and maximum rates in the taxation system. I do not know why tax relieves have been abolished in respect of investments, although Estonia applies a zero profit tax rate? Why is it planned to tax costs incurred in relation to the rehabilitation or wellness of labour force? Why are tax administrators entitled to an unlimited freedom to contest what used to be permissible and moral according to the law only two years ago? Why businessmen and company managers are still seen as enemies of the society, despite the legal denouncement of the social doctrine of equality? I believe that during this conference, specialists of this field will, in one way or another, frequently ask each other the question “why?”
I understand that as long as sport, life or business refuses to recognise the existence of an element of rivalry or competition, then there is no wish to try and do something quicker, more competently or better than the others or rather to reap more benefit, seek a higher appraisal, recognition or honour. I am happy to see so many specialists, businessmen and other stakeholders to have gathered to discuss this pressing issue. I sincerely hope that we can achieve what we all are striving at: that in terms of the level of economic development our country could catch up with the current member states of the European Union much sooner than in thirty years as it is foreseen in the National Long-Term Development Strategy. This would benefit us all: both the European Union and its future members, including Lithuania.
