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In autumn 2017, the Latvian government started working on amendments to the Latvian Taxes and duties act with the aim of introducing recommendations with respect to transfer pricing (TP) documentation stemming from the BEPS project outcomes. Currently, draft amendments have been approved by the Latvian parliament in the first round.
A review the draft amendments is planned in a second round on 4 September 2018, and after the third round the draft law will come into force. Taxpayers will be obliged to prepare Master and Local files as from the financial year starting in 2018.
In addition, the tax law amendments should also introduce other changes, e.g. a definition of related party, deadlines for submission of TP documentation, penalties for inaccurate TP documentation, and so on.
Country-by-country reporting requirements in Latvian tax law were introduced on 4 July 2017.
Content of TP documentation
Currently Latvian tax law defines the content of TP documentation. After the amendments are introduced, qualifying taxpayers will be obliged to prepare a Master file and/or a Local file in line with the content set by OECD Guidelines. This change will bring clarity and will result in less administrative burden for multinationals.
Although the Latvian State Revenue Service (SRS) generally requires taxpayers to submit tax related information in Latvian, the Master file may be submitted in English. However the SRS has the right to ask for a translation that has to be submitted within one month after a request from the SRS.
The Local file should be prepared in Latvian.
The obligation to prepare and submit Master and Local files
An essential novelty is the new thresholds set to determine the requirements for preparation and submission of TP documentation. Currently article 15.2 paragraph 2 in the Taxes and duties act states that TP documentation must be prepared by a taxpayer whose annual turnover exceeds EUR 1.43 million, and related-party transactions exceed EUR 14,300 annually.
Under the new amendments, the thresholds will be increased materially, as depicted in the table below:
| Transaction party |
When is Master File required? |
When is Local File required? |
Submission deadlines to tax authorities |
| Foreign related party or black-listed jurisdiction company |
If the transaction amount > EUR 15 m; or If the turnover > EUR 50 m and the transaction amount > EUR 5 m. |
If the transaction amount > EUR 5 m |
Mandatory submission within 12 months after the end of taxation year. |
| If the turnover is < EUR 50 m and the related party transaction amount is from EUR 5 m to EUR 15 m. |
If the transaction amount is from EUR 250 k to EUR 5 m. |
Prepared within 12 months after the end of taxation year and submitted to the tax authorities within 1 month upon request. |
| Latvian related party (only if transactions take place within one supply chain with a foreign related party) |
N/A |
If the transaction amount > EUR 250 k |
Should be prepared only upon request of tax authorities. Submission within 90 days after receiving a request (may be extended for additional 30 days). |
TP documentation must be revised and updated every year. However, if the situation of the company does not change significantly it is allowed to update only certain sections of the documentation and financial data used in the analysis. The whole TP documentation must be revised once in every three years.
Additionally, analysis is not required for transactions below EUR 20,000.
The SRS may request TP documentation to analyse risks and provide consultations
An interesting novelty in the draft law is an article that allows the SRS to request from the taxpayer TP documentation with the aim to „verify the risks of TP adjustments, to advise on possible TP adjustment risks, to offer voluntary adjustment of the corporate income tax (CIT) return or to invite the taxpayer to initiate the advance agreement procedure (APA).“ In this case the TP documentation should be submitted to the SRS within 90 days from the day of the request (with a possibility to extend the deadline by 30 days).
New penalties
If a taxpayer does not comply with TP documentation submission and if it significantly violates the TP documentation preparation rules, the SRS may apply a penalty up to 1% of the related party transaction value (for which the taxpayer is obligated to prepare the TP documentation), but no more than EUR 100,000. A significant violation would be, eg, incomplete TP documentation (required information is not included in the TP documentation) meaning that it is not possible to make a conclusion whether the agreed price is arm’s length.
Adjusting CIT returns and APA
Under the draft law taxpayers will be allowed to make adjustments in the CIT declaration for 5 years (currently 3 years) for adjustments resulting from TP adjustments. This amendment is introduced to align it with the TP audit period, that is, TP may be audited for 5 years.
Starting from 1 January 2019, it will be possible to conclude the APA not only for planned related-party transactions but also for transactions already carried out in the previous 5 years.
Audit deadlines
Considering that TP audits can be quite complicated, the amendments eliminate any deadlines for making decisions in TP audits. After the changes enter into force, TP audits would continue for an indefinite period.
Transactions with Latvian related parties
Before analysing whether a company has to prepare TP documentation it is necessary to understand whether the transaction partner qualifies as a related party. A definition of related party is included in article 1 paragraph 18 of the Taxes and duties act. The main change is that local companies which are associated with participation of less than 50% (currently 90% and certain companies using specific tax reliefs qualify as related parties) will not be considered as related parties.
Summary
The new tax law amendments bring major changes for taxpayers having transactions with related parties. The content of TP documentation and the obligations to prepare and submit TP documentation will change significantly. This means that many taxpayers will have to reconsider their TP documentation practices and plan regular TP documentation updates.
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We would like to introduce you to our new Senior Associate with our Tax & Customs Practice group in Latvia: Kristīne Erele, with a strong focus on VAT, at your service.
An experienced senior tax consultant with a demonstrated history in the accounting industry, Kristīne is skilled in direct and indirect tax and international tax law; an accomplished tax professional with a master's degree in Business Administration and Management from the University of Latvia. |
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If you would like to know more about Latvian corporate income tax reform, visit the homepage of Sorainen: http://www.sorainen.com оr our Facebook page www.facebook.com/SorainenTax. |
