Tax trends 2019
The new fiscal year started, as usual, with several changes in tax laws. The reasons behind are political ambitions mainly caused by the Parliament elections in Latvia last year. The most important changes affect the transfer pricing documents and files for related-party or so called controlled party transactions conducted in 2018 reporting year. Further on our brief comments about the new Transfer pricing (TP) rules.
Transfer pricing documentation files
Corporate income taxpayers (hereinafter – the companies) engaged in the business with related entities and persons including those located overseas or in listed offshores, or those involved in so called “chain transactions” from now on will be required to complete either global and/or local transfer pricing documentation files. The local TP documentation may also be required for two domestic companies involved in so called “chain transactions”. Since preparation of documents is time- and cost-consuming, whereas not all companies are engaged in the same business and scale, TP documentation files will be determined by the turnover/ volume of the controlled transactions being as follows:
- Global Transfer pricing documentation
The financial criteria for preparation of the global TP documentation is not easy to provide. In principle companies that have entered into controlled [related-party] transactions for 5 million EUR or more during the reporting year, will be required to produce the global TP documentation files.
- Local and simplified Transfer pricing documentation
Local TP documentation files should be prepared by those whose related-party transactions range between EUR 250 000 and 5 million euros. However, if the controlled transactions are services with low added value such as administrative support accounting or internal audit, management, HR, legal and similar services (typically provided within the group) companies may opt preparing a simplified TP documentation as determined by the Cabinet regulations No 802.
- Transfer pricing documentation in a free form
If the company was engaged in controlled transactions requiring neither global, nor local TP documentation files (i.e. all transactions below 250 000 EUR including those conducted between two domestic companies), it still needs to prepare some price justification, but it could be done as before - in a free document (written) form.
Delivery and timing
Both global and local documentation files should be prepared within 12 months after the end of the reporting year. The differences are in the presentation and delivery of documents to SRS. As example, companies whose turnover exceeds 50 million EUR or whose volume of controlled transactions is 5 million EUR or more shall submit the respective TP documentation files to SRS during 12 months after the end of the company’s financial year. In other cases the documentation should be at taxpayer’s disposal and ready to be presented to SRS upon its request (deadline is 1 month). Besides, if SRS within the scope of the company’s tax audit will find out the “chain transactions” exceeding 250 000 EUR, it may request submitting the local TP documentation in 90 days (additional 30 days could be granted upon taxpayer’s request).
There could be situations when taxpayers need to prepare both global and local TP documentation. Global documentation could be prepared in English, but State Revenue Services (hereinafter – SRS) may request its translation into Latvian.
“Chain transactions”
Now even two Latvian resident companies (corporate income taxpayers) could be considered as related parties. This will be applicable in cases when the transactions, commercial or financial relationships – as per the functions performed or risks undertaken, controlled or managed, or by assets involved - are deemed to be related or in other words, performed within the chain of supply of the services or sale of goods with the aggregate amount of EUR 250 000 and more to related foreign company including the listed offshores[1]. Consequently, a transaction between two domestic companies could be classified as a transaction carried out with related foreign company if the second [Latvian] company has been trading within the transaction chain involving the foreign company.
Controlled foreign entities/ artificial transactions
The Corporate Income tax law has been changed from 1 January 2019 imposing a new obligation on companies: to include also profits from so called artificial transactions with CFC companies in their tax base. CFC companies are those in which Latvian companies have a substantial influence - i.e. control either directly or indirectly in excess of 50%. Whereas artificial or unreal transactions are those conducted in order to gain tax advantages that otherwise - without exercising of the control over the foreign company - Latvian resident company would not be able to obtain. Nevertheless, there will be exemptions from the above rules; when the annual profits of foreign companies will be less than EUR 750 000 and income from sales of goods and services (with the exception of sales to black-listed offshores) will be less than EUR 75 000.
Conditionally distributed earnings
We would like remind you about possible tax contributions due to conditionally distributed earnings in the last month of the company’s reporting year. Such conditionally distributed earnings may represent also income, which Latvian taxpayers would be entitled to receive (or expenses they would not incur) if the controlled transaction with related party would be carried out at arms-length. Based on the above rule SRS has rights to request companies during the tax audit to justify prices applied in controlled transactions. In case of the failure to submit the documents or in case SRS will consider the company’s price assessment as insufficient, additional taxes could be levied on the company. We therefore recommend to examine all related-party transactions before submitting of company’s 2018 annual reports to SRS and, if necessary, to prepare the required TP documentation files. The list of related-parties is provided in Clause 1 of the Taxes and Duties Act.
New rules on TP documentation are applicable for the company’s fiscal year which commences in 2018. The penalties for failure to submit the documents to SRS (or submit insufficient TP documentation) could reach 1% from the amount of controlled transactions with maximum cap of 100 000 EUR. The statute of limitations in respect of the controlled transactions and related tax risks is 5 years.
If you seek assistance with preparation of the Transfer pricing documents or look for advisory in relation to the appropriate TP method to be applied, or need any help with the preparation of simplified TP documentation (in a free document form) please contact by email our TP specialist Reinis Ceplis, reinis@bakertilly.lv, or head of the tax department Ina Spridzane, ina@bakertilly.lv
[1] Antigua and Barbuda, American Virgin-islands, Bahamas, Bahrain, Brunei, Dominicac, Djibouti, Ecuador, Grenada, Guam, Jamaica, New Caledonia, Jordan, Kenya, Liberia, Macau, Maldives, Sao Tome and Principe, Saint Pierre and Miquelon, Saint Helena Island, Tahiti, Tonga, Vanuatu, Venezuela, Zanzibar.