## 1. Benchmarking Tax Revenues

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### A. Motivation and benchmarking
- Spending pressures and defense:
  - Need to boost defense spending adding to ageing population and green transition investment needs.
  - Defense spending expected to increase by an additional 2 percent of GDP relative to previous 2024 projections and would reach 5 percent annually from 2026-30.
  - In July 2025, the Council activated the escape clause for 15 member states, including Lithuania, allowing exemption of up to 1.5 percent of GDP in defense budgets from deficit calculations.
- Recent and proposed fiscal measures:
  - 2024 defense fund package measures:
    - increase in the corporate income tax (CIT) from 15 to 16 percent;
    - faster increase in the CO₂ component for energy products from 2025 to 2030;
    - inclusion of a security component in excise duty rates for gas and oils intended for agricultural use;
    - additional increases in excise duty rates for alcoholic beverages and tobacco;
    - extension of the banks’ solidarity contribution through 2025.
  - Draft law approved by Parliament in June 2025 proposing changes from January 2026, key features:
    - PIT: maintain exemptions for lower-income earners and same phase-out rates but add more tax brackets, pool most income types together (with some exceptions, e.g. dividends), and introduce an intermediate tax rate of 25 percent.
    - CIT: standard rate increase to 17 percent, reduced rate rise to 7 percent, introduction of instant depreciation of certain fixed assets, limitations on deductions of tax losses.
    - Property taxes: additional 0.2 percent tax on commercial immovable property with revenue allocated to the State Defense Fund; change to non-commercial immovable property thresholds and two-basket taxation (primary residence vs other), with revenues from non-primary residence allocated to the State Defense Fund until 2030.
    - VAT: increase reduced rate from 9 to 12 percent (lower rate for books to remain 5 percent); no VAT relief for heating, hot water and firewood.
    - Excise: excise duty on sweetened non-alcoholic beverages and concentrates.
    - Insurance: 10 percent tax for non-life insurance premiums.
- Government’s Proposed Tax Policy Changes and Expected Revenue Impact (Ministry of Finance estimates, percent of projected 2026 GDP):
  - PIT: Proposal (20/25/32 for thresholds of 0-36, 36-60, and >60 average wages) — 0.23 percent of GDP.
  - CIT: 17 percent rate and 7 percent reduced rate, instant depreciation of certain fixed assets, limitations on deductions of tax losses — 0.05 percent of GDP.
  - Property:
    - Non-commercial property owned by individuals:
      - (a) primary residence — EUR 450,000 non-taxable threshold, municipal tax rates 0.1 to 1 percent allocated to municipal budgets;
      - (b) other property — EUR 50,000 non-taxable threshold and progressive tax rates 0.2 to 1 percent set by law, revenues allocated to the State Defense Fund until 2030.
    - Commercial property: additional 0.2 percent tax allocated to the State Defense Fund.
    - Expected revenue impact: 0.08 percent of GDP (except from primary residence for which the size of impact will depend on decisions taken by the municipalities).
  - VAT: Increase 9 percent reduced rate to 12 percent, lower rate for books to 5 percent, no VAT relief for heating, hot water and firewood — 0.09 percent of GDP.
  - Sugar tax: Excise duty in EUR/hl differentiating by sugar content per 100 ml — 0.03 percent of GDP.
  - Insurance tax: 10 percent tax for all non-life insurance premia — 0.12 percent of GDP.
  - Total (sum of items above): 0.6 percent of GDP.
- Benchmarking findings:
  - Lithuania’s tax-to-GDP ratio reached 22.3 percent in 2023, below the EU average of 26.1 percent.
  - Lithuania’s tax system relies more on VAT and excise duties; property taxes contribute a smaller share relative to other EU nations.
  - Lithuania’s PIT is less progressive than other Baltic countries; relatively few employees face the top PIT rate.
  - CIT productivity is higher than Baltic peers but overall CIT productivity is low compared to advanced economies, partly due to exemptions for small entities with less than EUR 300,000 in gross annual revenues.
  - Property taxes are low compared to EU advanced economies (EU advanced economies collect four times more).
  - VAT efficiency shows a notable efficiency gap compared to Estonia, indicating scope for VAT reforms.
- Tax potential:
  - Tax capacity is estimated at 30.6 percent of GDP, while actual collection is only 22.3 percent of GDP, indicating a tax gap and room to grow revenues.
  - The 30.6 percent tax potential positions Lithuania between European emerging and advanced economies, consistent with Baltic neighbors.

### B. Direct taxes (PIT and CIT) and reform scenarios
- Personal Income Tax (PIT) characteristics and issues:
  - Complex marginal rate structure with low progressivity driven by the basic allowance phase-out and varying statutory rates, causing sharp marginal tax rate increases at low-to-average income levels.
  - Two thirds of the population’s income is below 12 average wages (below EUR 20,000) taxed at a marginal tax rate of 30 percent.
  - Only 0.1 percent of the population earns income above 120 average wages subject to the highest tax rate of 32 percent.
  - Lithuania faces some of the highest income inequality relative to comparator countries.
  - The revised law approved in June aims to make the PIT system more progressive: incomes below 36 average wages facing a 20 percent rate, a new 25 percent bracket for incomes between 36 and 60 average wages, and 32 percent rate for income above 60 average wages.
- PIT reform scenarios and revenue impacts:
  - Streamlining marginal rates and adding middle-income tax brackets could yield up to 0.5 percent of GDP in additional funds (“Progressive 1” scenario).
  - An even more progressive tax schedule could raise over 1 percent of GDP (“Progressive 2” scenario).
  - Removing the phase out of the basic allowance completely—smoothing marginal rates entirely—would lower tax revenues by more than 1 percent of GDP.
- Marginal Tax Rates – 2024 System and alternatives (selected entries preserved exactly)
  - Current System brackets (EUR and %):
    - Bracket 1: 0 – 8,964 -> 0%
    - Bracket 2: 8,965 – 11,088 -> 20%
    - Bracket 3: 11,089 – 26,004 -> 30%
    - Bracket 4: 26,005 – 34,371 -> 23.6%
    - Bracket 5: 34,372 - 114,162 -> 20%
    - Bracket 6: >114,162 -> 32%
  - Government Plan (proposal to be implemented in Jan 2026):
    - Bracket 1: 0 – 8,964 -> 0%
    - Bracket 2: 8,965 – 11,088 -> 20%
    - Bracket 3: 11,089 – 26,004 -> 30%
    - Bracket 4: 26,005 – 34,371 -> 23.6%
    - Bracket 5: 34,372 - 68,497 -> 20%
    - Bracket 6: 68,498 - 114,162 -> 25%
    - Bracket 7: >114,163 -> 32%
  - Progressive I alternative (phase-out of basic allowance of 8,964 with different coefficients until income of 38,147 produces implicit marginal rates of 25, 28 and 30):
    - Bracket examples: 8,965-18,000 -> 20%; 14,001 – 20,000 -> 28%; 38,148 - 114,162 -> 31%; >114,162 -> 32%
  - Progressive II alternative (removes phase-out completely and sets statutory rates of 20, 28 and 32 at different income levels):
    - Examples: 11,089 – 26,004 -> 25%; 26,005 – 34,371 -> 28%; >20,000 -> 32%
  - Basic Allowance and phase-out parameters (2024):
    - Basic Allowance 8,964
    - Phase-out Range #1 11,088 to 26,004
    - Phase-out Rate #1 50.00%
    - Phase-out Range #2 26,004 to 34,371
    - Phase-out Rate #2 18.00%
- PIT analysis tools and caveats:
  - Graphs and decomposition based on the IMF’s Personal Income Tax Analysis (PITA) tool and Kakwani progressivity index measures.
  - World Inequality Database (WID) information based on household surveys; results need cautious interpretation due to potential underreporting at the top of the distribution and exclusion of social security contributions in the tool.
- Corporate Income Tax (CIT) findings and options:
  - CIT raised from 15 to 16 percent in January 2025, with a rise from 5 to 6 percent for the reduced rate; projected to generate a modest additional 0.04 percent of GDP in tax revenues based on revenue changes linked to previous CIT hikes.
  - A further proposed CIT hike from 16 to 17 percent could potentially yield an additional EUR 111.5 million in revenue when fully effective (excluding other CIT related changes), conditional on corporate profits and compliance.
  - Lithuania currently raises more CIT revenue than Baltic counterparts (who tax only distributed, not retained, profits at 20 percent), and a 16 percent rate remains competitive internationally and below the 21-22 percent averages in EU advanced economies and some Nordic countries.
  - Limited scope exists to raise substantial revenue through CIT rate hikes due to competitive pressures; focus should be on addressing exemptions that erode revenue, particularly the EUR 300,000 turnover threshold granting a reduced 7 percent rate for small businesses.
  - Policy option: consider a graduated rate or lowering the threshold to capture more firms under the standard rate to reduce the steep tax cliff that discourages firm growth.

### Property tax system, VAT, and administrative reforms
- Property tax system and administration
  - Two property taxes:
    - Land tax ranges from 0.01 percent to 4 percent of assessed value.
    - Immovable property tax ranges from 0.5 percent to 3 percent for real estate over EUR 150,000, targeting only high-value buildings.
  - Municipalities administer property taxes and grant exemptions; discretionary municipal exemptions lead to inadequate incentives, potential tax competition, and meagre revenues for local budgets.
  - Current property tax revenue: 0.3 percent of GDP.
- 2026 property tax policy change (design features and assessment)
  - Primary residences:
    - Municipalities set a non-taxable threshold of EUR 450,000.
    - Tax rates ranging from 0.1 percent to 1 percent.
    - Revenue directed to municipal budgets.
  - Other properties:
    - Non-taxable threshold of EUR 50,000.
    - Progressive tax rates from 0.2   percent to 1 percent set by law.
    - Revenue allocated to the State Defense Fund until the end of 2030.
  - Commercial properties: additional 0.2 percent tax, with revenue allocated to the State Defense Fund.
  - Assessment: change would only partially broaden the tax base and leave revenues far below international benchmarks; a reasonable target range for property tax revenues is between 1 and 2 percent of GDP.
  - Equity and relief design recommendations:
    - Tax relief should be individualized and based on means testing.
    - Include access to a tax deferral regime that taxes the most vulnerable only when assets change ownership to prevent permanent revenue loss.
- VAT: structure, gaps, and proposed changes
  - VAT configuration:
    - Standard rate of 21 percent, with exemptions and reduced rates.
  - Compliance gap:
    - Improved to 14.6 percent from 24.0 percent in 2018.
  - 2022 policy gap:
    - EUR 3,281 million (33.2 percent of potential revenue).
    - Components:
      - 22.7 percent non-actionable exemption gap.
      - 6.0 percent actionable exemption gap.
      - 4.5 percent rate gap (EUR 446 million), mainly from accommodation, restaurant, and pharmaceutical sectors.
  - Proposed law: raise the reduced rate from 9 percent to 12 percent for essentials like accommodation, transport, and cultural events — expected revenue EUR 80 million annually.
  - VAT C-efficiency:
    - Lithuania: 52.6 percent in 2022.
    - European EMs benchmark: 55.6 percent. Improving to 55.6 percent could yield an additional 0.5 percent of GDP in revenue.
    - Average of Latvia and Estonia: 61 percent. Improving to 61 percent could yield an additional 1.3 percent of GDP in revenue.
- Strategies to improve VAT efficiency and compliance:
  - Strengthen digitalization:
    - Expand the State Tax Inspectorate’s i.MAS system with real-time e-invoicing and AI analytics.
  - Reduce carousel fraud:
    - Address cross-border circular trading exploiting VAT-free intra-EU transactions through regional cooperation and promoting digital payments.
  - Simplify compliance, especially for small businesses:
    - Further raise the VAT registration threshold (currently set at EUR 45,000).
    - Offer pre-filled returns, as seen in Estonia.
  - Strengthen oversight of cross-border trade with stricter controls and Baltic collaboration.
  - Target VAT evasion hotspots with sector-specific audits in agriculture and fuel and pilot Poland’s split payment model.

### Revenue mobilization and tax reform priorities (staff proposals and impacts)
- Staff proposals and estimated revenue impacts:
  - PIT:
    - Existing Schedule: 0/15/20/32
    - Proposal: Increase progressivity by eliminating the current system of phase-out and lower income brackets.
    - Revenue impact: 0.2 –   1 percent
  - CIT:
    - Existing Rate: 16 percent
    - Proposal: Limit large CIT rate increases beyond 18 percent, and address exemptions.
    - Revenue impact: 0 –   0.1 percent
  - Property Revenues:
    - Existing: 0.3 percent GDP
    - Proposal: Broaden property tax base and limit exemptions. Use means-testing.
    - Revenue impact: 0.5 –   1.5 percent
  - VAT:
    - Existing Rate: 21 percent
    - Proposal: Increase efficiency through digitalization, improving compliance, reducing carousel fraud.
    - Revenue impact: 0.5 –   1.3 percent
- Conclusions and priorities:
  - Changes to the PIT, VAT, and property taxes would have sizeable revenue impacts while also producing other economic benefits.
  - PIT and property tax reforms could mobilize more revenue while making the tax system more progressive and providing more fiscal autonomy to municipalities.
  - Improving VAT efficiency through digitalization, reducing carousel fraud, and simplifying compliance would bring in greater tax revenues.
  - Prioritize PIT, VAT, and property taxes; CIT reform should focus on addressing exemptions.
- Methodological notes:
  - Revenue impact of PIT reforms estimated using the IMF Personal Income Analysis (PITA) revenue mobilization tool.
  - Revenue impact of CIT reforms using government revenue estimates from historical CIT changes.
  - Staff estimates and benchmarking used to assess the revenue impact of property tax and VAT reforms.

*Source: sipea2025137 — 1. Benchmarking Tax Revenues (PDF chapter), Republic of Lithuania, International Monetary Fund, July 29, 2025.*

### 1. Benchmarking Tax Revenues ________________________________________________________ 4

### 1. Benchmarking Tax Revenues

### A. Motivation and Benchmarking
- Lithuania faces a near-term need to boost defense spending adding to other mounting long-term spending pressures related to the ageing population and investment needs for green transition.
- Defense spending is expected to increase by an additional 2 percent of GDP relative to previous 2024 projections—and would reach 5 percent annually from 2026-30.
- Financing options include debt or EU funds, but mobilizing tax revenues is an essential part of a comprehensive fiscal package given multi-year scope and permanent components of spending pressures.
- Recent legislative changes (2024 defense fund package) included:
  - increase in the corporate income tax (CIT) from 15 to 16 percent;
  - faster increase in the CO₂ component for energy products from 2025 to 2030;
  - inclusion of a security component in excise duty rates for gas and oils intended for agricultural use;
  - additional increases in excise duty rates for alcoholic beverages and tobacco;
  - extension of the banks’ solidarity contribution through 2025.
- In July 2025, the Council activated the escape clause for 15 member states, including Lithuania, allowing exemption of up to 1.5 percent of GDP in defense budgets from deficit calculations.
- A draft law approved by the Parliament in June 2025 proposes further tax changes from January 2026. Key features include:
  - PIT: maintain exemptions for lower-income earners and same phase-out rates but add more tax brackets, pool most income types together (with some exceptions, e.g. dividends), and introduce an intermediate tax rate of 25 percent.
  - CIT: standard rate increase to 17 percent, reduced rate rise to 7 percent, introduction of instant depreciation of certain fixed assets, limitations on deductions of tax losses.
  - Property taxes: additional 0.2 percent tax on commercial immovable property with revenue allocated to the State Defense Fund; change to non-commercial immovable property thresholds and two-basket taxation (primary residence vs other), with revenues from non-primary residence allocated to the State Defense Fund until 2030.
  - VAT: increase reduced rate from 9 to 12 percent (lower rate for books to remain 5 percent); no VAT relief for heating, hot water and firewood.
  - Excise: excise duty on sweetened non-alcoholic beverages and concentrates.
  - Insurance: 10 percent tax for non-life insurance premiums.
- Table of Government’s Proposed Tax Policy Changes and Expected Revenue Impact (Ministry of Finance estimates, percent of projected 2026 GDP):
  - PIT: Proposal (20/25/32 for thresholds of 0-36, 36-60, and >60 average wages) — 0.23 percent of GDP.
  - CIT: 17 percent rate and 7 percent reduced rate, instant depreciation of certain fixed assets, limitations on deductions of tax losses — 0.05 percent of GDP.
  - Property:
    - Non-commercial property owned by individuals: (a) primary residence — EUR 450,000 non-taxable threshold, municipal tax rates 0.1 to 1 percent allocated to municipal budgets; (b) other property — EUR 50,000 non-taxable threshold and progressive tax rates 0.2 to 1 percent set by law, revenues allocated to the State Defense Fund until 2030.
    - Commercial property: additional 0.2 percent tax allocated to the State Defense Fund.
    - Expected revenue impact: 0.08 percent of GDP (except from primary residence for which the size of impact will depend on decisions taken by the municipalities).
  - VAT: Increase 9 percent reduced rate to 12 percent, lower rate for books to 5 percent, no VAT relief for heating, hot water and firewood — 0.09 percent of GDP.
  - Sugar tax: Excise duty in EUR/hl differentiating by sugar content per 100 ml — 0.03 percent of GDP.
  - Insurance tax: 10 percent tax for all non-life insurance premia — 0.12 percent of GDP.
  - Total (sum of items above): 0.6 percent of GDP.
- Benchmarking findings:
  - Lithuania’s tax-to-GDP ratio reached 22.3 percent in 2023, below the EU average of 26.1 percent.
  - Lithuania’s tax system relies more on VAT and excise duties; property taxes contribute a smaller share relative to other EU nations.
  - Lithuania’s PIT is less progressive than other Baltic countries; relatively few employees face the top PIT rate.
  - CIT productivity is higher than Baltic peers but overall CIT productivity is low compared to advanced economies, partly due to exemptions for small entities with less than EUR 300,000 in gross annual revenues.
  - Property taxes are low compared to EU advanced economies (EU advanced economies collect four times more).
  - VAT efficiency shows a notable efficiency gap compared to Estonia, indicating scope for VAT reforms.
- Tax potential:
  - Tax capacity is estimated at 30.6 percent of GDP, while actual collection is only 22.3 percent of GDP, indicating a tax gap and room to grow revenues.
  - The 30.6 percent tax potential positions Lithuania between European emerging and advanced economies, consistent with Baltic neighbors.

### B. Direct Taxes (PIT and CIT) and Reform Scenarios
- Personal Income Tax (PIT) characteristics and issues:
  - PIT has a complex marginal rate structure with low progressivity driven by the basic allowance phase-out and varying statutory rates, causing sharp marginal tax rate increases at low-to-average income levels and potentially discouraging work for full-time median wage earners.
  - Two thirds of the population’s income is below 12 average wages (below EUR 20,000) taxed at a marginal tax rate of 30 percent.
  - Only 0.1 percent of the population earns income above 120 average wages subject to the highest tax rate of 32 percent.
  - Lithuania faces some of the highest income inequality relative to comparator countries.
  - The revised law approved in June aims to make the PIT system more progressive: incomes below 36 average wages facing a 20 percent rate, a new 25 percent bracket for incomes between 36 and 60 average wages, and 32 percent rate for income above 60 average wages (captured in the “Government Plan” simulations).
- PIT reform scenarios and revenue impacts:
  - Streamlining marginal rates and adding middle-income tax brackets could yield up to 0.5 percent of GDP in additional funds (“Progressive 1” scenario).
  - An even more progressive tax schedule could raise over 1 percent of GDP (“Progressive 2” scenario).
  - Note: Removing the phase out of the basic allowance completely—smoothing marginal rates entirely—would lower tax revenues by more than 1 percent of GDP.
- Table: Marginal Tax Rates – 2024 System and Alternatives (selected entries preserved exactly)
  - Current System brackets (EUR and %):
    - Bracket 1: 0 – 8,964 -> 0%
    - Bracket 2: 8,965 – 11,088 -> 20%
    - Bracket 3: 11,089 – 26,004 -> 30%
    - Bracket 4: 26,005 – 34,371 -> 23.6%
    - Bracket 5: 34,372 - 114,162 -> 20%
    - Bracket 6: >114,162 -> 32%
  - Government Plan (proposal to be implemented in Jan 2026):
    - Bracket 1: 0 – 8,964 -> 0%
    - Bracket 2: 8,965 – 11,088 -> 20%
    - Bracket 3: 11,089 – 26,004 -> 30%
    - Bracket 4: 26,005 – 34,371 -> 23.6%
    - Bracket 5: 34,372 - 68,497 -> 20%
    - Bracket 6: 68,498 - 114,162 -> 25%
    - Bracket 7: >114,163 -> 32%
  - Progressive I alternative (phase-out of basic allowance of 8,964 with different coefficients until income of 38,147 produces implicit marginal rates of 25, 28 and 30):
    - Bracket examples: 8,965-18,000 -> 20%; 14,001 – 20,000 -> 28%; 38,148 - 114,162 -> 31%; >114,162 -> 32%
  - Progressive II alternative (removes phase-out completely and sets statutory rates of 20, 28 and 32 at different income levels):
    - Examples: 11,089 – 26,004 -> 25%; 26,005 – 34,371 -> 28%; >20,000 -> 32% (table preserves entries as presented).
  - Basic Allowance and phase-out parameters (2024):
    - Basic Allowance 8,964
    - Phase-out Range #1 11,088 to 26,004
    - Phase-out Rate #1 50.00%
    - Phase-out Range #2 26,004 to 34,371
    - Phase-out Rate #2 18.00%
- PIT scenario analysis tools and notes:
  - Graphs and decomposition are based on the IMF’s Personal Income Tax Analysis (PITA) tool and Kakwani progressivity index measures.
  - World Inequality Database (WID) information is based on household surveys and approximates actual incomes; results need cautious interpretation due to potential underreporting at the top of the distribution and exclusion of social security contributions in the tool.
- Corporate Income Tax (CIT) findings and options:
  - CIT was raised from 15 to 16 percent in January 2025, with a rise from 5 to 6 percent for the reduced rate. This is projected to generate a modest additional 0.04 percent of GDP in tax revenues based on revenue changes linked to previous CIT hikes.
  - A further proposed CIT hike from 16 to 17 percent could potentially yield an additional EUR 111.5 million in revenue when fully effective (excluding other CIT related changes), conditional on corporate profits and compliance.
  - Lithuania currently raises more CIT revenue than Baltic counterparts (who tax only distributed, not retained, profits at 20 percent), and a 16 percent rate remains competitive internationally and below the 21-22 percent averages in EU advanced economies and some Nordic countries.
  - Limited scope exists to raise substantial revenue through CIT rate hikes due to competitive pressures; focus should be on addressing exemptions that erode revenue, particularly the EUR 300,000 turnover threshold granting a reduced 7 percent rate for small businesses.
  - Policy option: consider a graduated rate or lowering the threshold to capture more firms under the standard rate to reduce the steep tax cliff that discourages firm growth.

*Source: sipea2025137 — 1. Benchmarking Tax Revenues (PDF chapter), Republic of Lithuania, International Monetary Fund, July 29, 2025.*

### 12. Lithuania's property tax revenues are relatively low (Figure 4), and administrative

### 12. Lithuania's property tax revenues are relatively low (Figure 4), and administrative

### Property tax system and administration
- Currently two property taxes:
  - Land tax ranges from 0.01 percent to 4 percent of assessed value.
  - Immovable property tax ranges from 0.5 percent to 3 percent for real estate over EUR 150,000, targeting only high-value buildings.
- Municipalities administer property taxes and grant exemptions.
- Legislations include various exemptions with discretionary decision making at the municipal level.
- Consequences:
  - Inadequate incentives.
  - Potential tax competition at the local level.
  - Meagre revenues for local budgets that are already fairly balanced.
- Current property tax revenue: 0.3 percent of GDP (current Lithuanian level).

### 2026 tax policy change (property tax)
- Key design features:
  - Distinct provisions for residential and commercial properties.
  - Primary residences:
    - Municipalities set a non-taxable threshold of EUR 450,000.
    - Tax rates ranging from 0.1 percent to 1 percent.
    - Revenue directed to municipal budgets.
  - Other properties:
    - Non-taxable threshold of EUR 50,000.
    - Progressive tax rates from 0.2   percent to 1 percent set by law.
    - Revenue allocated to the State Defense Fund until the end of 2030.
  - Commercial properties face an additional 0.2 percent tax, with revenue allocated to the State Defense Fund.
- Assessment:
  - The change would only partially broaden the tax base and leave revenues far below international benchmarks.
  - A reasonable target range for property tax revenues is between 1 and 2 percent of GDP—significantly higher than the current 0.3 percent in Lithuania.
- Equity and relief design:
  - An ideal property tax should be levied according to the benefits principle as property owners benefit from public goods like infrastructure.
  - Tax relief ideally should be individualized and based on means testing individual applications for relief.
  - Include access to a tax deferral regime that taxes the most vulnerable parts of the population only when assets change ownership to prevent permanent revenue loss.

### VAT: structure, gaps, and proposed changes
- Lithuania’s VAT:
  - Standard rate of 21 percent, with exemptions and reduced rates.
- Compliance gap:
  - Improved to 14.6 percent from 24.0 percent in 2018.
- 2022 policy gap:
  - EUR 3,281 million (33.2 percent of potential revenue).
  - Components:
    - 22.7 percent non-actionable exemption gap.
    - 6.0 percent actionable exemption gap.
    - 4.5 percent rate gap (EUR 446 million), mainly from accommodation, restaurant, and pharmaceutical sectors.
- Proposed law:
  - Raise the reduced rate from 9 percent to 12 percent for essentials like accommodation, transport, and cultural events.
  - Expected revenue: EUR 80 million in annual revenue.
- VAT C-efficiency:
  - Lithuania: 52.6 percent in 2022.
  - European EMs benchmark: 55.6 percent.
    - Improving to 55.6 percent could yield an additional 0.5 percent of GDP in revenue.
  - Average of Latvia and Estonia: 61 percent.
    - Improving to 61 percent could yield an additional 1.3 percent of GDP in revenue.

### Strategies to improve VAT efficiency and compliance
- Strengthen digitalization:
  - Expand the State Tax Inspectorate’s i.MAS system with real-time e-invoicing and AI analytics.
  - The i.MAS system is a digital platform that integrates tax data, allowing authorities to monitor transactions and VAT filings more effectively.
- Reduce carousel fraud:
  - Address cross-border circular trading that exploits VAT-free intra-EU transactions.
  - Actions include regional cooperation and promoting digital payments to shrink the informal economy.
- Simplify compliance, especially for small businesses:
  - Further raise the VAT registration threshold (currently set at EUR 45,000).
  - Offer pre-filled returns, as seen in Estonia.
- Strengthen oversight of cross-border trade:
  - Stricter controls and Baltic collaboration.
- Target VAT evasion hotspots:
  - Sector-specific audits in agriculture and fuel.
  - Pilot Poland’s split payment model, where buyers pay VAT directly to a tax authority account rather than the seller.

### Revenue mobilization and tax reform priorities (staff proposals and impacts)
- Table 4 summary (Tax, Existing, Proposal, Revenue impact):
  - PIT:
    - Existing Schedule: 0/15/20/32
    - Proposal: Increase progressivity by eliminating the current system of phase-out and lower income brackets.
    - Revenue impact: 0.2 –   1 percent
  - CIT:
    - Existing Rate: 16 percent
    - Proposal: Limit large CIT rate increases beyond 18 percent, and address exemptions.
    - Revenue impact: 0 –   0.1 percent
  - Property Revenues:
    - Existing: 0.3 percent GDP
    - Proposal: Broaden property tax base and limit exemptions. Use means-testing.
    - Revenue impact: 0.5 –   1.5 percent
  - VAT:
    - Existing Rate: 21 percent
    - Proposal: Increase efficiency through digitalization, improving compliance, reducing carousel fraud.
    - Revenue impact: 0.5 –   1.3 percent
- Conclusions and priorities:
  - Changes to the PIT, VAT, and property taxes would have sizeable revenue impacts while also having other economic benefits.
  - Changes to the PIT and property tax systems could mobilize more revenue while making the tax system more progressive and providing more fiscal autonomy to municipalities.
  - Improving VAT efficiency through digitalization, reducing carousel fraud, and simplifying compliance would bring in greater tax revenues.
  - These three taxes (PIT, VAT, property) should be prioritized.
  - CIT reform should focus more on addressing exemptions.
- Methodological notes:
  - Revenue impact of PIT reforms estimated using the IMF Personal Income Analysis (PITA) revenue mobilization tool.
  - Revenue impact of CIT reforms using government revenue estimates from historical CIT changes.
  - Staff estimates and benchmarking are used to assess the revenue impact of property tax and VAT reforms.

*Source: REPUBLIC OF LITHUANIA, INTERNATIONAL MONETARY FUND (chapter content provided).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2025/english/sipea2025137.pdf_