While seeking ways to limit  fraudulent practices, range of counterparties applying special VAT regime (VAT reverse) is being extended in Latvia. Nevertheless, the VAT reverse in domestic transactions between two Latvian VAT payers is applicable to six major groups of goods and services[1] , now proposed for further extension. A similar trend for VAT reverse application for domestic transactions can be observed also in other EU Member States.

An application of VAT reverse to taxpayers sometimes creates confusion not knowing whether to apply it or not. In practice, the tax risk in transactions does not exist or it is minor for the involved parties except certain cases when the VAT reverse is replaced with the standard procedure i.e., VAT is indicated in the invoice and paid by the goods or services supplier to the state budget rather than the buyer who makes the input VAT deduction. If the supplier has paid the VAT for the transaction in the state budget, it can be agreed that the State Treasury has not lost anything and there is no formal cause for the buyer to deprive the right to input tax and apply penal sanctions only because a formal procedure is not followed.

Unfortunately, such an interpretation is not acceptable to the European Court of Justice (ECJ), which in April 2017 has given a judgment for case No C 564/15 in relation to legal proceedings between Mr. T. Farkas, VAT payer from Hungary and the Hungarian Tax Administration with regard tax administration's decision resulted with the fine for not paying VAT reverse. In this particular case between the supplier and Mr. T. Farkas, the buyer instead of VAT reverse as per the law in Hungary, a standard procedure was applied. The supplier paid VAT in the state budget and Mr. T. Farkas deducted it as input tax. The tax authorities during the audit revealed that there was no compliance with Hungarian VAT rules on the reverse pursuant to which the buyer of goods has to pay VAT directly to the Treasury not to the supplier and additional VAT payment and the fine of 50% were applied. The ECJ decided that the Hungarian tax authorities did not act contrary to the provisions of VAT Directive No 2006/112 and are entitled to refuse the customer the right to input tax as well as impose the penalty for deviation from the legislation. 

In this regard, we would like to draw attention of VAT payers in Latvian to the fact that the practice of State Revenue Service in Latvia (SRS) has changed. The assumption that the buyer's risk is low if standard VAT arrangements is applied and the supplier has paid the tax in the budget instead of the VAT reverse, is not correct. Having determined that the transaction is not suitable for reverse payment procedure if required by the VAT Law, the SRS has the right not only to calculate additional VAT payments to the buyer during the audit, but also to apply a penalty. 

To mitigate the risks, we recommend you to examine carefully all the transactions that are or could be a subject to VAT reverse and timely correct any errors, if any mistake could be identified. In this regard, it is important to respect the fact that the buyer once finding the potential mistake should contact the supplier and agree on the adjustment of invoice and refund of VAT to the customer. 

If you seek the advice or risk mitigation check, please contact us via e-mail leinonen@leinonen.lv. We will be glad to assist you.


[1] VAT reverse is applied for transactions with wood, scrap metal, construction, mobile phones, grains and precious metals and related services.