Latvia: Amendments on the Law “On Taxes and Fees” establishes that Taxpayer has an obligation to provide information on transactions with related parties.
Already for several years Tax administration and Tax payers in Latvia pay more attention on the matter of transactions between affiliated undertakings and the prices what have been applicable in these transactions (transfer price).
The Transfer price issues are international tax matters and mostly Tax laws in the European Union and in the Member States of the Organization for Economic Co-operation and more or less broadly establish the regulation for transfer prices. The international transactions of multinational enterprises and related tax issues are important in the field of tax planning and tax administration.
Until July 2012 in Latvia each Taxpayer individually or the entire group of companies assessed the tax risk regarding transfer pricing as well as the prevention of specific investments. The legislation of Republic of Latvia did not establish the mandatory requirement to prepare statutory content information (documentation of transfer pricing) to justify the transfer pricing compliance with the market prices.
On July 26, 2012 were made amendments to the Law "On Taxes and Fees", what bind the Taxpayers to provide the Tax administration with statutory content information regarding transactions between affiliated undertakings, to justify transfer price compliance with the market price. The amendments regarding transfer price shall come into force on January 1, 2013.
Now the Law provides the definition of the term "transfer price":
“Transfer price - the price (the value) of the goods or services, what is applied to transactions between affiliated undertakings, what according to the Law “On Enterprise Income Tax” are deemed to be affiliated undertakings, and one of what is a foreign company.”
The requirement to justify the compliance of transfer price with the market price refers to the Taxpayers what are established in the Law “On Enterprise Income Tax” - residents and permanent representative offices – what are doing business with:
1.) Affiliated foreign undertaking;
2.) Affiliated undertaking what forms together with the Taxpayer Group of Undertakings;
3.) Commercial companies or cooperative societies what are exempt from enterprise income tax or what use the tax allowances established in the legislation of Republic of Latvia;
4.) Related natural persons as defined in the Law “On Taxes and Fees”;
5.) Other companies or persons, if they are located or established in the low tax or tax free countries or territories.
Now the Law establishes that if in the above mentioned occasions the net turnover of the taxpayer in the year of account exceeds one million LVL (Eur 702`800,00) and the transaction amount exceeds LVL 10 000 (Eur 7`028,00), the transfer price (value) compliance with the market price (value) has to be based on the following information:
1.) The general description of the Taxpayer's business area and a short summary of the few last years what includes:
- Information regarding the industry;
- Economic and legal analysis of the factors that affect the prices of the Taxpayer's goods and services;
- The characteristics of business environment (competition, marketing opportunities and other market factors);
- The description of the intangible contributions what can affect the transaction price;
- Information about the business functions performed, the risk taken and the used (involved) assets;
2.) Taxpayer and a related group of persons organizational and legal structure and interrelationships;
3.) Information about Taxpayers' business strategy;
4.) Explanatory information on affiliated person business processes;
5.) Description of the subject of transaction;
6.) The conditions of the Transfer agreement;
7.) The projection of the Taxpayer's future operations in accordance with the concluded transaction;
8.) The description of the method used to establish the transfer price compliance with the market price;
9.) Depending from the used method, analysis of the financial indicators of comparable unrelated company;
10.) Other documents to justify the price (value) of transaction.
The information must be kept by the Taxpayer for five years and submitted to the Tax administration within one month of receiving the request. If the information is not submitted, the Tax administration determines the transaction's market price (value) of the information in its disposal. In five years time from the date of payment, the Tax administration shall be entitled to check the compliance of transfer price with the market price.
Another important novelty in the Law is the possibility of a Taxpayer to conclude a preliminary agreement on a market price determination of transaction with the Tax administration. Therefore Taxpayers can sign a preliminary agreement on market price determination for a particular transaction or form of transaction, if value of transaction or proposed transaction with the affiliated foreign undertaking exceeds one million lats per year. Such agreement shall be a paid service. Specific procedure how the agreement shall be concluded and the amount of charge shall be established by the rules of the Cabinet of Ministers.
Accordingly, if the Taxpayer shall have been acted in compliance with the agreement and its business activities are not against this agreement, the Tax administration shall not be entitled during the tax review (audit) to specify market price (value) for the particular transaction.
Tax Attorney & Founding Partner
Gencs Valters Law Firm, Riga
T: +371 67 24 00 90