PIT calculation and payment order for entrepreneurs declared in breach of Latvia’s Constitution

The Constitutional Court of Latvia has declared the norms that govern the calculation and payment order of personal income tax (PIT) for entrepreneurs in breach of the Constitution.
The court declared Part 3.1 and Part 6.1 of Section 11 of the Law on Personal Income Tax as non-compliant with Section 105 of the Constitution of the Republic of Latvia. The ruling is not subject to appeal.
The ombudsman was the one who turned to the Constitutional Court. He spent years going through complaints from many entrepreneurs about the PIT calculation and payment practice. The ombudsman found Part 3.1 and Part 6.1 of Section 11 of the Law on Personal Income Tax are in breach of Section 105 of the Constitution, which states that everyone has the right to own property. Property shall not be used contrary to the interests of the public.
This particular section also states that property rights may be restricted only in accordance with law. Expropriation of property for public purposes shall be allowed only in exceptional cases on the basis of a specific law and in return for fair compensation.
As previously explained by the Ombudsman’s Bureau, until 1 January 2018 – before the tax reform – the Law on Personal Income Tax provided the principle under which entrepreneurs, who are PIT payers, have to pay the tax from income, or profits, which is composed of income and difference from all operational costs.
On 1 January 2018 this practice along with Part 3.1 and 61 of Section 11 of the Law on Personal Income Tax was changed. This means that if costs for entrepreneurs were equal to their gained income or larger than gained income, there is no need to pay PIT. Currently the law makes it mandatory for entrepreneurs to pay PIT even if they are unable to work with profits.
Ombudsman Juris Jansons says – during examinations it was found that the only reason why such rules were made is a political agreement as a result of which entrepreneurs are forced to accept a bigger tax burden, thus ensuring coverage of revenue reduction in the state budget, which appeared as a result implementation of other tax reform goals.
«I believe the political agreement with intention to compensate the loss of revenue caused by the reform of other taxes is insufficient and there is no objective justification for the creation of such a tax burden. Therefore I conclude the legislator has disproportionately restricted the property rights of entrepreneurs paying PIT,» said Jansons.
Considering the fact the legislator did not respond to the ombudsman’s invitation to correct the law, it was decided to reach out to the Constitutional Court.