In autumn 2017 Latvian government started working on amendments in the Latvian Taxes and Duties Act with the aim of introducing the recommendations with respect to TP documentation in Latvia stemming from the BEPS project outcomes. Currently the draft law amendments are approved by the Latvian parliament in the first round.
It is planned to review the draft law amendments in the 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 financial year starting in 2018.
In addition, the tax law amendments should also introduce other changes, e.g. the definition of related party, deadlines for the submission of TP documentation, penalties for inaccurate TP documentation in Latvia, etc. The country-by-country reporting requirements in Latvian tax law were introduced on 4 July 2017.
Content of the TP documentation in Latvia
Currently Latvian tax law defines the content of the TP documentation. After amendments are introduced, qualifying taxpayers will be obliged to prepare master file and/or local file in line with the content set by the OECD Guidelines. This change will bring clarity and will result in a less administrative burden for multinational enterprises.
Although the Latvian State Revenue Service (SRS) generally request taxpayers to submit any tax related information in Latvian, the master file may be submitted in English. However, the SRS has rights to ask for the translation that has to be submitted within 1 month after the request from the SRS. The local file should be prepared in Latvian.
The obligation to prepare and submit master and local file
Essential novelty is the new thresholds set to determine the TP documentation preparation and submission obligations. Currently article 15.2 paragraph 2 in the Taxes and Duties Act states that TP documentation in Latvia must be prepared by the taxpayer if its annual turnover exceeds EUR 1.43 million, and related-party transactions exceed EUR 14,300 annually.
In accordance with the new amendments, the thresholds will be increased materially, as depicted in the table below:
The TP documentation in Latvia 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 3 years. Additionally, the analysis is not required for transactions below EUR 20,000.
The SRS will be allowed to request TP documentation in Latvia to analyse risks and to provide consultations
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 taxpayer to initiate the advance agreement procedure (APA)“. In this case the TP documentation in Latvia should be submitted to the SRS within 90 days from the day of the request (with a possibility to extended the deadline by 30 days).
New penalties regarding TP documentation in Latvia
In case a taxpayer does not comply with the TP documentation submission and if it significantly violates the TP documentation preparation rules, the SRS will be allowed to apply penalty up to 1% form the related party transaction value (for which the taxpayer is obligated to prepare the TP documentation), but no more than EUR 100,000. As a significant violation qualifies incomplete TP documentation (requested 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
The draft law provides that taxpayers will be allowed to make adjustments in the CIT declaration for 5 years (currently 3 years), if adjustments results from the TP adjustments. Such amendment is introduced to align it with the TP audit period, namely, TP may be audited for 5 years.
Starting from 1 January 2019 it will be possible to conclude the APA not only for the planned related-party transactions, but also for transactions already carried out during 5 previous years.
Considering that TP audits can be quite complicated, the amendments eliminate any deadlines for making decision in TP audits. After the changes enter into force, TP audits would continue for indefinite period.
Transactions with Latvian related parties
Before analysing whether the company has to prepare the TP documentation in Latvia it is necessary to understand whether the transaction partner qualifies as a related party. Related party definition 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.
The new tax law amendments bring major changes for taxpayers having transactions with related parties. The content of the TP documentation and the obligations to prepare and submit the TP documentation in Latvia will change significantly. Thereby many taxpayers will have to reconsider their TP documentation practices and plan regular TP documentation updates.
If you would like to know more about the TP documentation in Latvia, please visit the homepage of Sorainen, the Latvian partner firm of WTS Global.