Business leaders regard the plan to introduce a new economic security tax at a rate of 30%, which could top up the state budget by €28 million in 2026 and by as much as €42 million in 2027, as very "green" — one that will trigger a redistribution of the market but may not deliver the hoped-for gains.

At the parliamentary plenary sitting of 5 March this year, the Economic Security Tax Bill was referred by a majority vote to the Saeima Budget and Finance (Taxation) Committee for further consideration. The new tax is proposed to apply to several categories of goods originating in high-risk countries or purchased through a risky supply chain. High-risk countries will be placed on the list of high-risk countries by the Cabinet of Ministers on the basis of an assessment by the Ministry of Defence, the Ministry of Foreign Affairs, the Ministry of Finance and the Ministry of Economics, taking into account an aggressive state foreign policy or military threats, the use of a state's economic leverage instruments for political pressure, sanctions imposed on the country and the international security situation.

The rate of the economic security tax provided for in the bill is 30%, and it is planned to apply to residues and waste from the food industry, prepared animal feed, grain, plant seeds, cereal products, vegetables, animal or vegetable fats and oils and their cleavage products, prepared edible fats, mineral products not subject to excise duty, products of the chemical industry and its related industries, textiles and textile articles, as well as metals and metal articles. According to the estimates of the bill's authors, introducing such a tax could top up the budget by €28 million in 2026 and by as much as €42 million in 2027, even though it is noted a little further on that "until the list of high-risk countries is approved, it is not possible to forecast the fiscal impact of the tax precisely".

They want it in force from 1 May

Interestingly, in the bill's annotation its authors point to several objectives — to reduce and prevent risks to Latvia's economic security and political stability, to reduce Latvia's economic dependence on high-risk countries, to ensure fair and equitable competition, to prevent the division of society that is fostered by dependence on certain categories of goods, to promote social unity and solidarity, and to secure financial resources for strengthening Latvia's security and supporting Ukraine.

It should be borne in mind that two related bills have also been referred to the Saeima Budget and Finance (Taxation) Committee — amendments to the law "On Taxes and Duties" and amendments to the "Corporate Income Tax Law". The latter is intended to curb tax avoidance through payments to low-tax or no-tax jurisdictions, as well as to prevent financial resources from such payments ending up in the hands of persons controlled by low-tax or no-tax countries and territories and being used to fund activities that threaten the security, territorial integrity or political stability of Latvia and its partner countries or foster division in society.

The list of low-tax and no-tax countries and territories currently includes 10 countries or territories: American Samoa, Anguilla, Guam, Palau, Panama, Russia, the Turks and Caicos Islands, the US Virgin Islands, Vanuatu and Vietnam; Latvia has significant economic relations only with Russia. At the same time, the bill proposes to establish that in future a 50% tax will be withheld in Latvia on payments and dividends paid by Latvian residents or permanent establishments of non-residents to legal persons, natural persons and other persons located, formed or established in low-tax or no-tax countries (at present 20% is withheld). All three bills are intended to enter into force on 1 May 2026.

It will set off a market shift

"The proposed bill effectively means a substantial market shift. A 30% tax on goods from the so-called high-risk countries will inevitably affect prices and the structure of supply," says Ināra Šure, Chair of the Council of the Federation of Food Companies of Latvia (LPUF), when asked what the impact of the intended bill will be, noting that in the short term it may cause price rises in individual categories, because companies will have to look for alternative suppliers or absorb additional costs. In the long term it would be a signal that risky markets must be abandoned and greater transparency ensured on questions of origin.

"Yes, that could be one of the direct effects, because companies will look for suppliers within the EU or among trusted partners and will assess security of supply as a strategic priority rather than merely a question of price," Šure replies when asked whether such a tax will result in new suppliers, other regions or third countries. She wishes to point out that reorienting supply is neither quick nor cheap — it is a matter of several years, not of a single budget year. "Partly, yes, but not entirely," Šure answers when asked whether local producers can replace risky imported products. In her view it will also be a question of time, because no reorientation can be carried out immediately.

"Latvian food producers already supply a substantial share of the market, and such a policy may give an additional impetus to local production, but in reality not all raw materials are available in Latvia, not all categories have sufficient capacity, and competitiveness will still be a critical factor. This is not a story about fully replacing imports, but about a smarter and safer import structure," says Šure. She recalls that the bill's annotation provides that this burden will be targeted and will not apply to all companies equally, yet to some degree it will create an administrative burden.

"This is certainly a politically sensitive proposal. On the one hand, it is based on real geopolitical concerns and economic security arguments. On the other, the timing and the form raise questions," Šure replies when asked whether this is a pre-election bill. In her view, if decisions are taken in haste, without a full impact analysis, there is a risk that the consumer will pay for security. "The bill rewrites the logic of the market — from the cheapest to the safest. The question is whether the consumer will be prepared to pay for it."

The bill is "green"

"Figuratively speaking, the bill as submitted is very green; it does have noble aims in imposing an additional tax on a range of goods imported from Russia, essentially putting a stop to their use, but at the same time it overlaps with other regulations. For example, some goods are already banned from import because they are governed by other sanctions mechanisms. The metals sector is already substantially restricted under the sanctions regime — EU sanctions prohibit the import of several categories of metal products, in particular iron, steel and gold articles. For food and agricultural products, on the other hand, the sanctions restrictions are on the whole smaller," assesses Ingūna Ābele, head of tax practice at ZAB WALLESS. She points out that the 30% rate of the economic security tax may encourage importers of the goods subject to this tax to purchase the same goods legally with documents of origin from another country, even though the actual place of production might be Russia.

"Topping up the state budget with additional millions of euros is necessary, but instead of the several tens of millions of euros written into the annotation the sums may be far smaller," Ābele observes. "In some product groups the intended economic security tax will also overlap with another fairly new instrument — the carbon border adjustment mechanism provided for in the European Union's CBAM (Carbon Border Adjustment Mechanism) regulation. This provides for additional charges on imports of goods that, because of the EU's CO₂ emission limitation requirements, are more profitable to produce outside the EU. Essentially, in this way the EU is trying to level the playing field between those producing in the EU and producers outside the EU, and also to deter EU producers from the idea of moving production to countries outside the EU with more relaxed emission limits," Ābele explains. She recalls that the regulation covers direct greenhouse gas emissions arising in the production of cement, iron and steel, aluminium, fertilisers, hydrogen and electricity products.

"Although the relevant imported goods must start being recorded in 2026, tax on them will only have to be paid in 2027, and rough estimates in some publications suggest that fertiliser prices could rise by around 30%. On top of that, farmers would then have to reckon with a 30% economic security tax on mineral fertilisers produced specifically in Russia," Ābele explains. She hopes that the Saeima Budget and Finance (Taxation) Committee, in working on the economic security tax bill, will manage to prepare it in a way that is aligned with other regulations while not worsening the competitiveness of Latvian businesses in the common EU market, where no such tax will be in place.

It will not achieve the objectives set, Kaspars Gorkšs, Director General of the Employers' Confederation of Latvia

In reality, the proposed Economic Security Tax Bill will not help achieve any of the objectives set out. By imposing an additional tax on goods, we are repeating Trump's tariff wars. It will neither reduce nor prevent risks to Latvia, nor prevent division in society, nor ensure fair and equitable competition. With one exception — it may make some contribution to the security budget. But that is also the biggest subject for debate: is it not absurd that we are introducing a security tax whose revenue depends on how much we trade in goods from unsafe countries? If the tax revenue plan for the security budget is not met, what will we do?

Will we urge businesses to buy more from unsafe countries? The application mechanism is so unclear that it allows the list of third countries to which the security tax applies to be expanded at any moment, and it could soon be used as a mechanism for patching the budget, which makes it dangerous. Turning to the categories of goods that are to be taxed, the heaviest blow would fall on farmers, who are already in a difficult position with the large rise in fuel prices, with marked-up seed and mineral fertilisers on top of that, and on less well-off members of the public.

Imposing sanctions on Russia and Belarus, and extending them too, would be understandable, with clear rules; starting tariff wars without working out the consequences, on the other hand, is short-sighted. Introducing new taxes before austerity measures have been taken in state spending runs counter to the government's commitment to stabilising the economy.

For information: the economic security tax is proposed to apply to the following groups of goods

–       residues and waste from the food industry, prepared animal feed;

–       grain, plant seeds, cereal products;

–       vegetables;

–       animal or vegetable fats and oils, their cleavage products, prepared edible fats;

–       mineral products not subject to excise duty;

–       products of the chemical industry and its related industries;

–       textiles and textile articles;

–       metals and metal articles.

Source: Dienas Bizness, based on Saeima materials