Results of tax administration audits

In accordance with information provided by Latvian State Revenue Service 55% of all taxes collected by Latvian tax authorities during tax audits in 2015 was value added tax (VAT). However, 11 % or 26.4 millions EUR was a corporate income tax, from which a significant part was the tax calculated on transfer pricing adjustments.

There were 14 hearings at the first level courts (district and cities courts), 5 hearings at the second level courts (regional courts) and 2 hearings in the Supreme court of Latvia during the period of 2011 till 2015. Bearing in mind that Latvian tax payers usually are not keen to got to the court (approximately 3% of all decisions of the tax authorities have been appealed in the next instance) it is important indicator of tax risks area.

Short summary of requirements for transfer pricing documentation in Latvia

According to the Corporate Income Tax Act (further – CIT Act) all transactions with related parties must be carried out at market prices.

The market price principle provides that the price applied to a transaction between two related parties shall agree with an arm’s length price, i.e. a fair market price that would be applied to a similar transaction between two unrelated parties in similar circumstances.

The CIT Act states that prices applied by Latvian taxpayers must be the arm’s length in transactions with any of the following parties:

  • a related foreign company,
  • a related company with which the taxpayer forms a group of companies pursuant to the CIT Act;
  • a company that is exempt from CIT or applies CIT reliefs available under other Latvian laws;
  • a related individual;
  • any person (individual or legal) situated or established in low tax and tax-free countries and territories.
 
 

Latvian taxpayer with a net turnover exceeding 1 400 000 euro and transactions with related parties totaling over 14 300 euro per annum must have transfer pricing (TP) documentation to demonstrate compliance of performed transactions with the market price principle. 
TP documentation should contain information about industry, company and its group, as well as functional and economic analysis. 
 


Transfer pricing audit procedures and penalties

A taxpayer is required to prepare TP documentation in the Latvian language and to submit to the tax authorities within a month after receiving a request. If the taxpayer fails to submit required documentation within the proper time, the tax authorities may assess a fair market price for related party transactions and adjust taxable income according to information available to them.
 

The tax authorities have a right within the scope of a TP audit for transaction between related companies of which one is a foreign company, to assess or adjust the amounts to be indicated in the CIT declaration and to impose penalties within 5 years of the statutory payment term laid down in the tax legislation. Whereas transactions between Latvian related companies three-year audit period applies. If any additional assessment is made during the TP audit, there will be imposed statutory interest on arrears and penalties ranging from 20% to 30% of understated CIT amount. 

If the taxpayer has carried out transactions in accordance with the provisions of the concluded advance pricing agreement and no changes have occurred in its business to conflict with the mentioned advance pricing agreement, the tax authorities are not entitled to adjust the price determined for the particular transaction or type of transactions.