The idea of discussing the possibility of introducing a natural resources tax on every cubic metre of roundwood harvested in a clear-fell has come as an unpleasant surprise to forest sector businesses and has made them object categorically to this kind of solution for topping up the state coffers.
The idea originates from the materials drawn up for the State Tax Policy Guidelines, which analyse and assess value added tax, the small-tax regimes, labour costs, the impact of the corporate income tax reform, the taxation of real estate objects, and natural resource and climate taxes, and which propose a scenario for further action.
“These documents say ‘proposals for discussion’, but nowhere do they state that existing tax rates have to be raised or new ones introduced, even though these proposals can de facto be regarded as specific proposals for changes to the tax system,” says tax expert Ainis Dābols, board member of the Latvian Association of Tax Consultants, assessing the situation. He draws attention to the possibility that foresters, too, may have to “swallow a bitter pill”: a proposal has emerged to assess the application of the natural resources tax to timber harvested in clear-fells, or to introduce “stumpage money” by applying a tax per cubic metre of timber.
“No rates are given, but it is indicated that the natural resources tax would fall due once the report on the felling permit used has been filed with the State Forest Service. If, after a clear-fell, the forest is left to regenerate naturally, the tax would be payable in full. In other cases the application of reductions could be considered, but 2.1 million euros has already been entered in the table of potential revenue,” A. Dābols explains.
It will be challenged in the Constitutional Court
“A natural resources tax on timber harvested in a clear-fell would fit in nicely in Latvia’s eastern neighbour, not in an EU member state. Since the forest sector (forestry + wood processing + all the fields connected with it) is one of the cornerstones of our national economy in the regions, one has to ask who might benefit from such an idea, and whether it is not the handiwork of some foreign agents of influence out to harm the Latvian state?” says Modris Fokerots, one of the largest forest owners. He points out that if such a provision “appears” in the natural resources tax rules, it will be challenged in the Constitutional Court, because the tree is the fruit, while the resource (where it grows) is the land.
“It will be interesting to see whether such a natural resources tax concept could next be applied, say, to harvesting agricultural crops over a larger area, with millions of euros ‘rolling into’ the budget,” M. Fokerots says ironically, adding that in his view this is absurd. Several other private forest owners surveyed regard the idea of introducing such a natural resources tax as yet another slap in the face for the sector, although they take a positive view of the idea that after a clear-fell the forest is regenerated by planting.
They cannot believe it
The forest sector businesses surveyed could not even believe there was a “proposal for discussion” on a possible natural resources tax on every cubic metre of roundwood harvested in a clear-fell without seeing the actual document. Some tried to work out how large this tax might theoretically be, arriving at 0.5–0.53 euros per m³ of roundwood. The revenue calculated for 2025 alone (2.1 million euros) was set against the volume of timber harvested in final felling (clear-felling) – 10–11 million m³.
“That is a “splendid” proposal for reducing the sector’s competitiveness, for helping producers in competitor countries, and, on top of that, for creating a bureaucratic system to collect this tax, which will itself need money. Do people working in state institutions really come up with such ideas and ‘put them on paper’, or are they simply giving in to the promoters of pseudo-ideas?” said one of those surveyed indignantly, stressing a genuine wish to find out who authored the natural resources tax idea. He also asked which country in our region – Finland, Sweden, Estonia, Lithuania or Poland – has any natural resources tax on timber harvested in a clear-fell.
Five arguments AGAINST
“There are several substantial reasons why the idea of levying a natural resources tax on a cubic metre of roundwood harvested in a clear-fell cannot be supported,” says Kristaps Klauss, vice-president of the Latvian Forest Industry Federation, admitting that he learned of the “discussions” about such an idea by chance, and that no talks about it have been held with forest sector business and forestry organisations.
“How can anyone even put forward an idea ‘for discussion’ about broadening the natural resources tax base to include the cubic metre of timber harvested in a clear-fell, when growing timber and the commercial activity of selling timber are already burdened with a fairly impressive load of taxes and duties?” K. Klauss points out, noting that forest owners have to pay real estate tax (for pine-dominated stands it is paid for as much as 60 years before the stand reaches timber harvesting parameters), and that, alongside this, when selling a standing timber felling site or prepared timber they must pay personal income tax, or corporate income tax in the case of legal entities.
“And there is more – as of 1 January 2023 the state duty for issuing a permit for clear-felling was increased several dozen times over,” K. Klauss continues to argue his case. From the point of view of the administrative burden and of maintaining it, there is no sense in creating a new tax on timber transactions when they are already taxed directly or indirectly through three different taxes or duties.
“It is no accident that timber transactions are subject to reverse-charge VAT and a specialised personal income tax rate, because practice has shown that taxing a cubic metre of timber inevitably gives rise to a large ‘grey economy’ and unfair competition. Unlike the hectare in the case of real estate tax, the fact of taking out a permit in the case of the state duty, or the transaction amount in the case of personal income tax, the ‘cubic metre’ cannot be successfully checked or administered,” K. Klauss says, pointing to the risk of a growing shadow economy. In his view, the natural resources tax idea ‘for discussion’ on every cubic metre of roundwood from a clear-fell should be forgotten, because there are many other ways of topping up the state purse with larger tax revenues that are more effective and cheaper to administer.
“One could of course look at raising the rate of some existing tax, but the best course would be not to ‘clip’ the sector’s wings by imposing new restrictions or bans, but instead to promote the sector’s growth on a national scale. Everyone would gain, because businesses would pay more in taxes than they do now,” K. Klauss reckons.
There will be no extra revenue
One of the forest owners surveyed predicted that a natural resources tax on cubic metres of timber harvested in a clear-fell will not be introduced, and that even if one did “slip” through the Saeima’s “mill”, the amount of money raised from it would be very small indeed. Namely, if clear-fells are regenerated by planting, the tax will not have to be paid, because the idea “for discussion” states: “If, after a clear-fell, the forest is left to regenerate naturally, this tax is paid in full.” In other cases the application of a reduction may be considered.
The only question is when the tax falls due – immediately after the timber is sold, or when the set deadline for regenerating the clear-felled area arrives, or whether the forest owner will first be made to pay the natural resources tax and then be refunded it once the area has been planted up. “That would be more like forest owners issuing an interest-free loan to the Latvian state, and administering it (the loan) would needlessly consume taxpayers’ money, of which there is little enough as it is.”
There will be enough seedlings
“If seedlings of the relevant tree species are ordered in good time, their availability will not be a problem,” answers Pēters Putniņš, chairman of the board of the largest seedling grower, a/s “Latvijas valsts meži”, when asked about the availability of tree seedlings should forest owners wish to regenerate all clear-fells with quality planting material, stressing that the capacity of the company’s four nurseries exceeds the consumption of seedlings needed for forest regeneration in Latvia.
“We can grow as many seedlings as are needed, but they must be ordered in good time – at least a year, or better still two, before the planned planting, that is, before the regeneration of the forest harvested in the clear-fell,” P. Putniņš explains.