"It is strange... The opportunities exist, but unlike other European Union member states, Latvia is in no hurry to take advantage of the opportunities provided by the EU, not only regarding energy resources but also for curbing the rise in food prices, and if we continue like this, Latvia will be the most expensive country." (Jānis Zelmenis, partner at BDO Latvia)
In order to maintain the competitiveness of their national companies and the purchasing power of their citizens, many European Union countries, such as Germany, Italy, and Ireland, have reduced excise tax rates on energy resources, while Hungary has set a maximum selling price for fuel, and Poland has also 'trimmed' its value-added tax rate; Latvia is taking a different path – promising support to low-income recipients.
This is shown by a BDO study. As prices for natural gas and electricity have risen rapidly in European Union member states, a European Commission statement on the security of energy supply and affordable energy prices was issued in March 2022. It offered options for mitigating the impact of high electricity prices on residents and businesses. Several EU countries have already introduced reduced VAT rates for gas, electricity, and/or district heating. Meanwhile, some countries have not fully utilized the available options. And, although minimum excise tax rates for energy resources are set in the European Union, in some member states, these tax rates are even lower than the EU-permitted minimum rate.
The Baltic Path
After examining the approaches taken by Poland, Hungary, Estonia, Lithuania, and Latvia in shaping energy resource prices, BDO researchers concluded that the Polish government has paid the most attention to maintaining and reducing energy resource prices. Poland implemented the most significant measures, such as reducing excise tax and VAT, and providing benefit and support programmes for residents and companies. Hungary also significantly influenced fuel prices by reducing excise tax and setting a price cap for fuel.
Comparing the actions of the Baltic states, researchers conclude that Estonia stands out the most, having significantly reduced the excise tax on natural gas and electricity and having considered a draft law on VAT reduction, whereas in Latvia, more consideration was given to applying benefits for residents.
Already at the end of 2021, Estonia decided to expand energy price subsidies for low-income families, extending them to households whose income per main breadwinner is less than 1,126 euros per month. According to Estonia's Minister of Public Administration Jaak Aab (Jaak Aab), this means that approximately 380,000 households across Estonia will benefit. The cost of these subsidies is approximately 79 million euros, which will be covered by revenue generated from selling CO2 emission credits.
On 25 January 2022, the Estonian government approved electricity (0.12 €/KWh) and gas (65 €/MWh) price caps for households and the cancellation of electricity distribution fees for businesses (previously these had only been halved) to mitigate the negative impact of rising energy prices. These relief measures were in effect from January to March 2022. In Estonia, the excise tax on electricity and natural gas was significantly reduced.
The excise tax rate for natural gas was reduced to 2017 levels. However, the most significant excise tax reduction is not for natural gas, but for electricity consumption, where the excise tax rate decreased 4.5 times from 1 May – from 4.47 euros to 1 euro per MWh, which is the minimum rate allowed by the European Union. For consumers, this means a reduction in electricity prices of approximately 3.1%. Large electricity consumers are provided with an excise tax rebate of 0.5 €/MWh.
BDO researchers point to a forthcoming draft law to reduce the preferential VAT rate from 9% to 5% and expand the range of goods to which it applies. In the draft law, fuel subject to excise tax has been added to this list.
Lithuania acted slightly differently, announcing that it would postpone the final stages of energy market liberalisation because disruptions could arise due to the surge in energy prices. To help residents adapt to the rise in energy resource prices, the expansion of heating assistance for the 110,000 poorest households was discussed. The Lithuanian parliament has passed legislation to allow a larger number of residents to apply for heating subsidies, and the government plans to set electricity price caps for consumers, spreading the increase over the next 5 years. On 1 April 2022, the Lithuanian government began implementing a package of measures worth 2.26 billion euros to mitigate the impact of inflation and strengthen energy independence.
To partially absorb energy price shocks, the government is compensating residents for part of the gas and electricity prices, allocating 570 million euros for this purpose. At the same time, companies are being offered not only compensation solutions for gas and electricity prices, for which 120 million euros have been set aside, but also targeted funding for affected sectors in the amount of 142 million euros. Other measures are aimed at older people and those receiving the minimum wage, by increasing social benefits and introducing heating compensation. The government's plan for increasing residents' income includes 315 million euros. The plan also provides for investments in energy independence, with 1.12 billion euros allocated in the budget.
In Latvia, the Law on Measures for the Reduction of Extraordinary Increases in Energy Resource Prices came into force in January 2022, with the aim of mitigating the negative socio-economic impact related to the extraordinary rise in energy resource prices on the welfare of the population and economic growth.
It describes measures for reducing the increase in energy resource service prices and support measures for specific population groups. No changes were made to the excise tax and VAT amounts in Latvia compared to other countries. A support programme in the context of rising energy prices was established; for example, a monthly benefit of €50 per child was granted to families with children and students up to 24 years of age from January to April 2022, and a €20 monthly support for paying energy bills was provided for large families, along with other types of benefits.
Tax 'trimming' in Poland
The BDO study shows that various measures have been taken in Poland to curb the rise in energy resource prices. The excise tax on petrol, diesel, and electricity was reduced to the EU minimum level, and a temporary exemption from excise tax for household electricity was also introduced. To further reduce fuel prices, VAT on fuel was reduced from 23% to 8%, which will provide Polish residents with significant savings on fuel bills.
Another benefit for Polish residents is the reduction of the VAT rate on natural gas to 0%, as a result of which Polish households will be affected by a smaller price increase than in the majority of European Union countries. A 0% rate has also been set for VAT on staple food products, and a reduced 5% VAT rate for electricity, which will allow Polish residents to save a significant sum per month. The benefit system was also strengthened to help households struggling with energy bills; 870 million euros were allocated for this purpose, affecting 7 million households.
Currently, the Polish government is developing new support packages and a system to protect its residents from rapid price increases. The State Secretary also announced that the government is extending tariff protection for individual customers and sensitive recipients, such as hospitals and kindergartens, until 2027.
The obvious – the incredible
"The data show a paradoxical, incredible picture: wealthy countries – Germany, Italy, Ireland, and also Poland – unlike, for example, Latvia, have already introduced significant reductions in excise and value-added tax rates in order to keep energy and food prices within some reasonable limits amidst rapid inflation," explains BDO Latvia partner Jānis Zelmenis.
He reminds us that alongside the reduction of tax rates, a benefit system has also been introduced, which is what Latvia is talking about. "In essence, in Latvia, there have not yet really been any qualitative discussions about curbing the inflation that is robbing everyone's pockets – both citizens and businesses – justifying this by saying that 'reducing tax rates will be support for the rich'. It is strange that there are so many rich people in Latvia who, the moment that the 21% VAT rate on bread becomes 5% or even 0%, will immediately purchase not one loaf of bread per week, but two or three at once," analyses J. Zelmenis. He does not understand why the political parties ruling in Latvia do not really want to use foreign experience to curb inflation. "Of course, inflation is mainly imported through the very rise in energy resource prices, but that is not a reason why we could not fight against it. Is inflation not imported in Germany, Italy, or Ireland? Just like in Latvia, it is imported into the mentioned countries as well, but despite this, these countries have already introduced measures to slow down the rise in energy resource prices," answers J. Zelmenis when asked whether it is possible to curb imported inflation at all. The study shows that France and Italy have carried out the most significant measures to maintain or reduce energy resource prices, while Germany and Ireland also show quite significant reductions in excise tax. In all countries, a well-thought-out support system for residents can be observed; France, Romania, and Germany are particularly notable in this regard.
The Hungarian path
Even though a maximum selling price for natural gas was already introduced in Latvia last heating season, Hungary introduced a maximum price cap for petrol and diesel as early as November 2021 – 1.21 €/litre. "As a result, fuel in Hungary currently costs 0.85–0.90 €/litre less than in Latvia, and don't tell me that this doesn't affect companies' production and transport costs, as well as the purchasing power of residents!" emphasises J. Zelmenis. He reminds us that in Latvia, ideas for reducing excise tax rates for fuel are not even at the discussion level. "The fact that fuel costs several tens of cents less in Poland than in Latvia seems not to surprise anyone anymore, but it is paradoxical that currently, fuel at petrol stations in Germany also costs less than in Latvia," concludes J. Zelmenis. However, he believes that in the context of the approaching elections, this situation should not persist for long.
The French recipe
J. Zelmenis draws attention to the fact that in France, the electricity tax was reduced to the minimum from February 2022 to the end of January 2023. The government believes that this is a way to limit the increase in electricity bills. Specifically, the domestic tax on electricity consumption is 1 €/MWh for households and 0.5 €/MWh for businesses, and it has been noted that it cannot be lower. Previously, this tax was 22.50 €/MWh. Reduced electricity tax rates were introduced for collective public transport, data centres, aircraft, and a zero rate was applied to electricity produced on ships and boats.
The government announced a 15-cent discount per litre of fuel at petrol stations for French residents and businesses. The promotion will be in effect until at least 1 August 2022.
The aim of this discount is to protect French residents, given the rise in fuel prices observed over several months. Residents were paid an inflation bonus of 100 euros, which was paid out automatically to help residents cover energy bills. The inflation benefit was granted in the period from December 2021 to February 2022.
The VAT rate for electricity differs depending on the subscribed capacity: if it is less than or equal to 36 kWh, then the reduced rate is 5.5%, but if it exceeds 36 kWh, the standard rate is 20%, and the standard rate is applied to the entire bill. The VAT rate for the consumption of natural gas and oil products is the standard rate, i.e., 20%; however, a reduced rate of 5.5% is applied to natural gas supply subscriptions for all consumers.
The Italian approach
On 2 May 2022, Italian Prime Minister Mario Draghi outlined a new set of measures worth 14 billion to help families and companies, as well as to accelerate the introduction of renewable energy resources and upgrading equipment.
The main measure of the package is a one-time bonus of 200 euros for 28 million workers and pensioners (with income under 35,000 euros per year). It then includes a 0.8 percentage point reduction in the social security tax rate for state officials, and a 200 million euro fund for companies trading with Russia, Ukraine, and Belarus. A 600 million euro fund has also been created to help large cities implement the goals of the Recovery and Resilience Facility. The excise tax reduction for fuel has also been extended: the discount, which is 30 cents per litre of petrol and diesel, has also been applied to methane vehicles, for which the excise tax will be zero, and VAT has been reduced from 22% to 5%. For companies, the tax rebate for the purchase of gas and electricity increases to 25%. Meanwhile, for freight carriers, a 28% tax rebate for the first quarter of 2022 will be granted for expenses incurred when purchasing diesel fuel.
Energy-intensive companies are also provided with a 10% tax rebate for natural gas purchased in the first quarter of 2022. Three billion euros will be used to adjust public procurement prices because high inflation is affecting raw materials used in construction. The project provides for 3 billion for 2022, 2.5 billion for 2023, and 1.5 billion for each year from 2024 to 2026.
Regarding the VAT rate for natural gas, it was reduced from 10% to 5%, and excise taxes have a reduction of 25 cents for petrol, gas oil, and liquefied petroleum gas, while the differentiated excise tax reduction is being stopped so that it does not fall below the minimum tax level, the BDO study points out.
Ireland's response already in March
From 10 March 2022, the excise tax on petrol was reduced by 20 cents in Ireland, and the excise tax on diesel by 15 cents. The reduced rates will be in effect until 11 October 2022. VAT rates for electricity and natural gas will be reduced from 13.5% to 9%.
Germany reacted as early as January
On 9 January 2022, the German government announced targeted measures to help vulnerable households cover their heating bills in full. The country has also offered a one-time subsidy package of 130 million euros for low-income households.
On 24 March, the government agreed on additional measures worth approximately 15 billion euros, including a temporary reduction in fuel prices for three months by cutting taxes (by 30 cents for petrol and 14 cents for diesel).
The energy tax on fuel was reduced to the European minimum from June to August. Other measures include a one-time payment of 300 euros, a 100-euro voucher for increasing child benefits, and a reduction of the monthly public transport fee to 9 euros per month, the BDO study notes.
Romania's price caps
On 7 September 2021, the Romanian parliament passed a law to protect vulnerable consumers from the rise in energy prices starting from 1 November 2021, providing that subsidies could be used for housing heating support, energy consumption, energy-efficient home equipment, and for purchasing products and services that improve the energy efficiency of buildings or connection to the energy network.
Energy Minister Virgil Popescu announced compensation for both electricity and gas bills on 4 October 2021. The measures lasted from 1 November 2021 to 31 March 2022 and affected approximately 6 million families, or 85% of Romania's population. In addition to households, public and private hospitals, schools, kindergartens, NGOs, and public social service providers also received compensation. On 11 January 2022, the Romanian government announced a new protection scheme for household consumers with consumption of up to 300 kWh per month, including a reduction in VAT to 5%, as well as compensation for the green certificate and the cogeneration consumption surcharge. The government also developed a support scheme for natural gas.
On 20 March 2022, the Romanian government set price caps for electricity and natural gas for one year. Household consumers who do not consume more than 100 kWh per month will pay 14 cents per kilowatt, but if their consumption exceeds 300 kWh, they will pay no more than 16 cents per kilowatt. Industrial clients will pay up to 20 cents per kilowatt. Regarding natural gas, its price for household consumers will be no more than 6 cents, and for industrial consumers no more than 7 cents per kilowatt.
The government announced a series of grants and vouchers worth 3.5 billion euros to help vulnerable Romanians and key industrial sectors overcome rising prices and supply shocks.
The package includes support for energy bills for small businesses, grants for attracting new investments, and support for current public construction contracts, as well as support for Romanian farmers and fuel price subsidies for transport companies. Furthermore, approximately 4.7 million pensioners and other low-income families received vouchers worth 50 euros every two months for staple food products.
From 1 January 2022, the VAT rate for energy was reduced to 5% in Romania for the provision of district heating during the cold season (from 1 November to 31 March) for the following consumer categories: residents, hospitals, non-governmental organisations, and recognised social service providers, the BDO study notes.
The last moment
"Study foreign experience and immediately develop a plan of action with several solutions regarding how and with what instruments it is best to maintain the competitiveness of companies operating in Latvia and at the same time not turn residents into poor people who can only afford to purchase food," answers J. Zelmenis when asked what to do. Pointing to the data in the study, he expresses that, unlike the ruling politicians in Latvia, other countries have already taken significant steps to curb inflation.
"I doubt whether in a situation where energy resources are cheaper for a long time in Poland, Hungary, Romania, and even more so in Germany, compared to Latvia, it will be economically advantageous for businesses in many spheres to operate here, but those are jobs and taxes again, as well as purchasing-power consumers," answers J. Zelmenis when asked what the consequences of doing nothing could be. In his opinion, Latvia has already missed the moment when concrete decisions should have been made, but there might still be time. "Perhaps Latvia is a land inhabited only by billionaires who don't need any support," he ironically answers when asked why there are no real measures in Latvia yet. "The EU VAT directive amendments allow every member state to introduce a specially reduced (lower than 5%) value-added tax rate for food products, water, medicines, pharmaceutical, health and hygiene products, books and periodicals, passenger transport, as well as solar energy panels, and other member states are already using this, but not Latvia, even though there is the usual idea about a reduced VAT rate for food, but it should be taken into account that the Saeima majority has simply rejected this idea several times already," reminds J. Zelmenis. He rushes to add that Latvia currently has the highest excise tax rates compared to Poland, Lithuania, and Estonia.
Article first published in the issue of the magazine "Dienas Bizness" on 14 June 2022