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The OECD’s Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the “Convention”) was approved on 24 November 2016. As many as 69 countries (including Latvia and Lithuania) signed it on 7 June 2017, with eight countries (including Estonia) having expressed their intention to sign it. Under the Convention, Latvia has opted to apply only provisions for implementing the minimum standard of the action plan on BEPS and to ensure as far as possible that the new provisions complement the existing provisions of the covered tax treaties, or that new provisions not amending the provisions of the covered tax treaties are applied.
The Latvian Cabinet of Ministers’ decision of 9 May 2017 to support the draft national tax policies for 2018–2021 has made it clear that the next six months will see significant changes to the Latvian tax system. Confirming the intention announced earlier to move the Latvian corporate income tax (CIT) regime closer to the Estonian model, the proposed policy solutions provide for reforming the CIT system from 1 January 2018 to charge a 0% tax on reinvested profits and a 20% tax on gross profits at the time of distribution. With the proposals still at a developmental stage, this article explores the Estonian model to discover how the so-called 20/80 tax rate principle works.