Commission Report (2002): Latvia

• Progress since the last Regular Report
• Overall assessment
• Conclusions

Chapter 29: Financial and budgetary provisions

Progress since the last Regular Report

Latvia has made some progress in this area since the last Regular Report.

Concerning the national budget and EC co-financed measures, Latvia has concentrated its efforts on improving the budget planning process in the context of the medium-term budget planning framework. The planning mechanism now provides for planning of EC co-financed measures as well as national co-financing for Structural and Cohesion Funds assistance (included already in the 2002 state budget).

Some progress has been achieved in terms of development of the supporting systems for budget planning and training of staff. Regarding forecasting capacities, a model for macroeconomic analysis has been developed and an expenditure model of the central government and local government budget elaborated. Work on the elaboration of shortterm expenditure forecasts of the state budget has been started. The IT system for budget planning has somewhat improved.

Preparations for the application of the own resources system have continued. As regards administrative capacity, the institutions which will participate in the system of own resources are in place with the exception of sugar levies. The inter-ministerial working group under the management of the Ministry of Finance has continued its activities. Its task is to co-ordinate the establishment of the necessary procedures, infrastructure and capabilities to fulfil the administrative conditions in the area of own resources. The working group should be replaced by a permanent own resources unit in the Ministry of Finance to co-ordinate the calculation, control and payment of own resources and contacts with and reporting to the Commission in this area. Latvia has taken administrative steps to ensure adequate co-ordination between the various authorities involved in the application of the system of own resources.

Overall assessment

Latvia has further advanced in strengthening its budgetary rules, but particular efforts are still necessary to bring its budgetary framework further into line with the standards generally applicable in the Community. Evaluation and monitoring procedures for programmes and projects need to be improved.

Overall preparations for application of the acquis on own resources are progressing well, but sustained efforts continue to be required with regard to the build-up of technical and administrative capacity. Moreover, Latvia needs to develop its reporting system on cases of fraud and irregularity. As regards traditional own resources, Latvian customs legislation is largely in line with the EC acquis, but further harmonisation should be carried out. Particular efforts need to be made with regard to certain reporting and accounting requirements. The systems for 'A' and 'B' accounts are still to be set up in the National Customs Board as well as in the National Tax Board for sugar levies. The central accounting system for customs duties at the National Customs Board has to be modified to meet 'A' and 'B' account requirements. The final organisation and procedures for sugar levies remain to be established. Reliable data transmission between the customs clearance system and the central accounting system needs to be ensured. Accounting methods for post-clearance debt recovery still remain to be aligned with Community requirements. Moreover, the EC Integrated Tariff (TARIC) interoperability of the customs clearance system needs to be established.

As regards value added tax (VAT), Latvia adopted legislative amendments in November 2001, but further efforts are required in this field in order to reach full alignment with theacquis. For the purposes of own resources, considerable efforts need to be made with regard to the calculation of the weighted average rate (WAR) in accordance with the ESA-95 standard and to determine the impact on the VAT base of any special arrangements agreed under the Taxation Chapter. Latvia should continue to participate in the VAT simulation exercise, which is the key tool for effectively testing Latvia`s capacity in the field of the VAT resource. Sustained efforts are also needed to improve the actual collection and control of VAT.

The calculation of GNP is generally in line with the acquis requirements. Nevertheless, sustained efforts continue to be required regarding the ongoing process of quality and methodology improvements in the calculation of GNP and the national accounts, including completing their exhaustiveness and fine-tuning the implementation of the ESA-95 concept.

As regards administrative capacity, all the institutions necessary for applying the own resources system are in place, except for sugar levies. Efforts are required to increase the financial and human resources in the departments of the Central Statistical Bureau responsible for compiling the national accounts and calculating the GNP estimate.

With regard to the control of future EC own resources, Latvia should continue its efforts to set up effective instruments to combat VAT and customs duty fraud so that the financial interests of the EC can be protected. In addition, further efforts will be required to strengthen the administrative capacity in the context of the relevant policy areas described elsewhere in this report, such as Financial Control, Agriculture, Customs, Taxation and Regional Policy, and to calculate the GNP in a reliable and accurate way.

Conclusions

In its 1997 Opinion, the Commission concluded that, in order to ensure that own resources were established, monitored and made available in line with Community regulations, Latvia would have to overhaul its existing customs system. Furthermore, for the purposes of accurately calculating the GNP resource considerable improvements would have to be made to the national accounts to ensure that they were reliable, homogeneous and complete. The Commission added that improving the statistics would also be essential for drawing up the VAT own resources base, which would mean bringing Latvia`s VAT system fully into line with the Community directives.

Since the Opinion, Latvia has made considerable progress in these areas, in particular as regards the alignment of its customs system and progress towards applying the ESA-95 concept. The legal framework for budgetary management and for the transparency and efficiency of financial flows to and from the EC budget is largely in place, but needs to be completed. The institutional structures are generally in place, but further strengthening is essential.

Negotiations on this chapter continue. Latvia is generally meeting the commitments it has made in the accession negotiations in this field.

In order to complete preparations for membership, Latvia`s efforts now need to focus on the strengthening of its technical and administrative capacity. In particular, Latvia needs to focus on the calculation of the VAT base, setting up the necessary procedures for sugar levies and achieving TARIC-interoperability of the customs clearance system. Also the exhaustiveness of the national accounts should be guaranteed and the ESA-95 concept fully implemented so as to ensure the capacity to establish properly and make available the country`s contribution to each of the own resources of the Communities. Latvia needs to put in place a permanent own resources unit that will be responsible for the calculation, control and making available of own resources by the date of accession.

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