Viewing cable 05VILNIUS144

05VILNIUS1442005-02-11 14:17:00 2011-08-30 01:44:00 CONFIDENTIAL Embassy Vilnius
This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 VILNIUS 000144 
E.O. 12958: DECL: 02/09/2014 
     ¶B. B. 2004 VILNIUS 760 
 ¶1. (SBU) Summary.  Finance Minister Algirdas Butkevicius, 
meeting with Ambassador Mull on February 9, delivered an 
optimistic prognosis for Lithuania's continued strong 
economic growth.  While stressing that some politically 
difficult questions still lie ahead, Butkevicius discussed 
several areas of the economy on which he is focused and 
expressed confidence in Lithuania,s continued economic 
success.  Butkevicius is using the target of Euro convergence 
in 2007 to keep Lithuania's deficits and fiscal policy in 
line.  He discussed his hopes for adjusting Lithuania,s tax 
code to provide more incentives for growth and to discourage 
the shadow economy.  Butkevicius discussed prospects for 
Lithuania's continued economic growth and pointed to 
Lithuania's recent Euro bond issuance as an example of strong 
investor confidence in Lithuania's economy.  Minister 
Butkevicius pledged support on a variety of tax questions 
that affect GOL-USG relations  END SUMMARY. 
¶2. (C) Ambassador Mull met with Algirdas Butkevicius, 
recently reconfirmed as Finance Minister, February 9 as part 
of his tour of Lithuania's new Cabinet (ref a).  It was the 
Ambassador's eleventh cabinet-level meeting in the last seven 
weeks.  Butkevicius had previously expressed concern about 
the then-rising profile and strength of the Labor Party (ref 
b), which is now part of the ruling coalition.  He observed 
that the current government is experiencing a "trial period" 
and is under pressure from the press.  He is, nonetheless, 
optimistic that Lithuania's social and economic position will 
continue to improve.  Butkevicius said that he believes that 
2006 will be the most difficult year for Lithuania, because 
the Government will have to increase revenues in order to 
meet criteria for entering the Eurozone in 2007.  He agreed 
with the Ambassador's comment that revenue-raising mechanisms 
-- i.e., increasing taxes and decreasing expenditures -- are 
not popular with parliamentarians. 
Euro Convergence and Eurobonds 
¶3. (SBU) Ambassador Mull asked for Butkevicius' views of the 
recent Article IV evaluation of Lithuania by the IMF, which 
gave the country high marks, but raised concerns about the 
savings rate, productivity, and fiscal policy.  Butkevicius 
said that the key to further reform was the GOL's euro 
convergence program.  Butkevicius said that meeting euro 
convergence criteria by the GOL's target of 2007 would 
address the IMF's principal concerns, particularly in 
controlling Lithuania's deficit spending.  He said that Prime 
Minister Brazauskas fully supports this goal and, with 
respect to some of the austerity measure Butkevicius 
described to him, told the MinFin "we have to approve the 
convergence program, and we have to follow it."  Butkevicius 
also said that Lithuanian politicians seem increasingly 
interested in the convergence program, and that Butkevicius 
always explains that there are more advantages than 
disadvantages to the program. 
¶4. (SBU) Butkevicius spoke proudly of Lithuania's 600-million 
euro Eurobond issue that came out this month.  Demand for the 
issue exceeded 4 billion euros.  He also highlighted the 
bonds record-low yield 3.75 percent, as opposed to the 
Eurobond issue in 2004, which yielded 4.5 percent. 
Butkevicius feels that this decrease in the cost of borrowing 
reflects international market confidence in Lithuania's 
economic stability and prospects. 
Adjusting Lithuania's Tax System 
¶5. (SBU) When questioned by Ambassador Mull as to whether he 
approved the use of tax incentives to increase foreign direct 
investment (FDI) in Lithuania, Butkevicius noted that overall 
FDI increased in Lithuania last year.  He also noted that 
Lithuania's tax burden relative to GDP is the lowest in 
Europe. Butkevicius acknowledged, however, that the tax 
structure for Lithuania's capital and labor markets is 
unbalanced: for labor, taxes are too high, and for capital 
they are too low.  Butkevicius said that he would like to 
incrementally lower the personal income tax (PIT) in 
Lithuania.  Currently, the tax stands at 33%.  The Minister 
would like to reduce it to 30% in 2006, 27% in 2007, and 24% 
in 2008.  Butkevicius also said that he is in discussions 
amending the law on profits to recognize training costs as 
business expenses. 
¶6. (SBU) Butkevicius detailed plans to be made in conjunction 
with the Ministry of Social Security and Labor (MSSL) to 
increase the threshold at which employer contributions to 
SODRA - Lithuania's retirement and health social insurance 
system - are required to be paid.  The Ministry of Finance's 
tax inspectors, who collect the SODRA taxes on behalf of the 
MSSL, would also work with the Department of Statistics on 
this issue.  However, Butkevicius added that his ministry has 
trouble training the tax inspectors.  Butkevicius also cited 
Lithuania's large shadow economy as a target of his 
attention.  He expressed his hope to address this vast pool 
of unreported income and uncollected tax and customs fees by 
prohibiting the sale of imported goods at Lithuania's 
enormous Garuniai open-air market. 
Lithuania's Continued Economic Growth 
¶7. (U) Lithuania's growth in GDP for 2004 was 6.6%. 
Butkevicius noted that the 2003 GDP growth figure of 9.9% was 
unsustainable and reflected a boom in real estate in 
construction; the 2004 figure more properly reflected the 
economy's long-term growth potential.   He noted another sign 
of the sustainability of this growth rate was the increase in 
Lithuania's exports to European Union (EU) countries, which 
in 2004 increased from previous years.  (The media reported 
on February 10 that Nord LB adjusted down its forecast of 
Lithuania's 2005 GDP from 6.6% to 5.9%.) 
Bi-lateral Issues 
¶8. (SBU) Ambassador Mull asked about a variety of bilateral 
issues focusing on taxation, many of which had been mentioned 
in the Ambassador's last discussion with Butkevicius in June 
2004 (ref b). Chief among these was Lithuania's application 
of VAT to USG assistance and Fulbright Scholars' stipends. 
Such taxation had led to the cancellation of planned 
anti-fraud training in 2004, and endangered a potential 
Science and Technology Agreement between the U.S. and 
Lithuania.  Butkevicius indicated that the Embassy should 
shortly receive formal notice from the Government on the 
resolution of this problem.  He also said he would resolve 
the issue of taxation of Fulbright stipends. 
¶9. (SBU) Ambassador Mull raised three other issues regarding 
taxes: inconsistencies in returning VAT refunds to U.S. 
diplomats; the tax inspectorate's attempt to have the U.S. 
Embassy register with the tax inspectorate for the purpose of 
collecting SODRA for locally engaged staff; and the tax 
inspectorate's continuing insistence that the Embassy pay a 
tax on trucks - thus preventing the Embassy from properly 
registering its trucks. 
¶10. (SBU) Regarding VAT refunds, Butkevicius noted that other 
diplomatic missions had also complained about this matter. 
He suggested that the missions draft a joint letter to the 
MFA, which would initiate a process to resolve the matter. 
Butkevicius said that he will talk to the MSSL to resolve the 
SODRA problem.  As to the truck tax, Butkevicius says that a 
decision has already been reached, and that he will shortly 
inform the Embassy of that decision in writing. 
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Comment: Fiscally Responsible - but not Flexible? 
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¶11. (C) Butkevicius was friendly and cooperative throughout 
the meeting, and seemed eager to resolve our bilateral 
issues.  He came across as a responsible fiscal 
disciplinarian; it is not surprising that he is unwilling to 
consider tax reductions as incentives to attract FDI to 
stimulate growth, since he sees his principal task as keeping 
the tax revenues flowing.  He does, however, seem pragmatic 
enough to review our various taxation problems with the GOL.