Dear client and cooperation partner,
In this Tax Newsflash edition, we draw your attention to expected amendments to the Corporate Income Tax law (CIT law), as well as some decisions of the Latvian Supreme Court Senate and the European Court of Justice which we see as valuable in relation to tax disputes and other issues.
1. AMENDMENTS TO CIT LAW
On 11 August, the Cabinet of Ministers (CM) approved draft amendments to the CIT law. These have yet to be adopted by the Saeima. Under the amendments, starting with the 2010 taxation period the plan is:
1.1. To apply the thin capitalisation rules to residents of Latvia, whereas under the present procedure these rules apply only to non-residents. The rules provide for an increase in taxable income for interest payments that exceed certain criteria.
1.2. To include leasing companies as one of the entities for whom loan interest payments need not be subject to the thin capitalisation rules.
1.3. To determine a procedure for writing off costs in relation to public and private partnership (PPP) contracts. Further, during the PPP contract period, a taxpayer will be able to write off in equal parts long-term investments made to a public partner’s fixed assets transferred by the PPP contract. These norms are also planned to apply to PPP projects already under way.
2. NEW CM CUSTOMS REGULATIONS
As of 12 August 2009, new CM regulation No 854 “On Simplified Declaration and Local Customs Clearance, Single Status of Permits, Certificate of Recognised Merchant, Recognised Sender, and Recognised Receiver” is in force. The regulation largely complies with previous CM regulation No 833 except for significant changes in relation e.g. to goods not subject to simplified declarations, issue of a single permit in another EU state, and local customs clearance of excise goods.
3. FREE TRAINING ON VAT DIRECTIVE
The European Commission has developed a six-hour training presentation on Council Directive 2006/112/EC on the common system of value added tax. Training materials are available electronically in English here (later to be available in other languages).
4. VAT “OPTIONAL NORMS” – ALREADY SOME FROM 1 OCTOBER?
Sorainen has previously advised of planned amendments to Latvian VAT Law in relation to introduction of optional norms of the European Union VAT Directive (2006/112/EC). The Ministry of Finance has made public its opinion that starting from 1 October this year, not six but three optional norms are planned to be implemented. These are:
1) expansion of deferred VAT payment in cases of import of goods or VAT warehousing;
2) adjustment of VAT to be paid into the state budget taking into account bad debts;
3) VAT payers grouping.
Please see here Sorainen’s tax blog for more information about these optional norms.
5. SIGNIFICANT COURT JUDGMENTS
5.1. Cases when VAT input tax can be deducted for services in relation to purchase of capital shares (European Court of Justice judgment C-16/00)
Increasingly often, Sorainen tax lawyers face clients’ problem where the Latvian State Revenue Service (SRS) disallows deduction of VAT paid on legal and other services supplied for purchasing shares in another company. In this regard we remind you that the European Court of Justice decided in the Case No C-16/00 (27 September 2001), Cibo, that VAT deduction is allowable in certain situations.
That is, if after purchasing capital shares the owner takes part in the management of a subsidiary (provides managerial, administrative, financial, commercial, or technical services), then VAT on (for example, legal) services related to the purchase of capital shares is deductible as a general administrative cost. If the new owner of the shares also performs non VAT-taxable transactions, then the deductible proportion of VAT should be calculated corresponding to the percentage of VAT-taxable transactions to non-taxable transactions performed.
5.2. VAT Input tax is claimable even if the declaration period lacks VAT-taxable transactions (Supreme Court Senate judgment SKA 62/2009)
Good news for constructors, real estate developers, and others. In this case, a company had accrued input tax for goods and services purchased that were necessary for construction works, but during the respective periods it made no VAT-taxable transactions. The construction works were also not finished. The SRS refused to refund the input tax based on its opinion that the VAT declaration for the period did not disclose (calculate) VAT to be paid to the state budget and in those circumstances no refund of overpaid VAT was possible even where the declaration disclosed deductible input tax for taxable transactions. The Senate of the Supreme Court did not agree with the SRS opinion, indicating that where VAT is not payable to the state budget (because the goods or services have not been realised) but the company has purchased goods for use in taxable transactions, then the company is entitled to repayment of input tax. It is notable that Sorainen clients have suffered the same SRS treatment and court proceedings are still ongoing.
5.3. VAT Input tax can be deducted for preparing land for construction work (Administrative Regional Court judgment AA43-0562-09/2)
In a similar case, the regional court issued a judgment in relation to the right to deduct and receive input tax overpayment incurred in relation to preparing land for construction - that is, clearing and similar work. Although land clearing was directly related to future construction works as well as to the taxpayer’s economic activity, the SRS refused to refund the VAT overpayment based on the opinion that a taxpayer could claim overpayment only where he had carried out construction on the land plot, and not merely performed preparatory work.
The regional court disagreed with the SRS opinion, taking the view that the taxpayer was entitled to refund of the VAT overpayment. The court indicated that when the taxpayer undertook to improve the land plot and clear the territory its intention was to build there so that the services were used for performing later transactions that would be subject to VAT. Although the judgment can still be challenged through cassation, the case raises the hope that a tendency will be established to finally change SRS practice not to return VAT overpayments just because construction works have not been carried out for whatever reason.
5.4. What is the time limit for liability for non-submission of declarations/annual reports? (Supreme Court Senate judgment SKA 261/2009)
We remind you that an administrative penalty up to LVL 300 is prescribed for non-submission of annual reports, statistical reports, or statistical information within the legal deadlines. In the opinion of the Supreme Court Senate, non-submission of annual reports or declarations within deadlines is a long-term violation and a person can be administratively penalised for it for up to four months starting from the day when the violation was discovered. Thus in cases of violation it is important to find out when the SRS discovered or could have discovered the violation. Based on the circumstances of the particular case, the Supreme Court Senate concluded that the SRS carried out a thematic examination of the person’s economic activity or transactions for the period when the person should have submitted the annual report/declaration but did not do so within the terms specified by law. Thus the time limitation of liability starts to run on the day when the SRS finished the first thematic examination even if the SRS only discovered the violation during a later examination.
5.5. In insolvency cases, the SRS must refund a tax overpayment instead of transferring it to cover other tax debts of the taxpayer (Supreme Court Senate judgment SKA 257/2009)
The Supreme Court Senate concluded that overpaid tax belongs to the taxpayer and should be returned to the taxpayer or transferred to the taxpayer’s tax debts, if any. However, in the case of insolvency, a tax overpayment cannot be transferred to reduce other tax debts because this could violate the interests of other creditors. Therefore, in cases of insolvency, the overpayment should be returned to the taxpayer and considered as property subject to creditors’ claims.
5.6. Failure to challenge a disadvantageous decision does not imply recognition of fault (Supreme Court Senate judgment SKA 76/2009)
An administrative penalty was imposed on a premises manager for violating rules regulating turnover of goods subject to excise tax (alcohol found on premises without accompanying documents and excise marks). Although the premises were leased to another person, the manager did not challenge the decision and paid the fine. Afterwards, when the SRS calculated additional excise tax on the basis of the administrative case materials, the manager refused to pay, on the basis that he was not the possessor of the goods and thus was not guilty of the violation. The Supreme Court Senate concluded that failing to challenge a disadvantageous decision and payment of a money fine in a case of administrative violation does not amount to acceptance of guilt of committing the administrative violation. But in relation to excise goods, the Supreme Court Senate indicated that to justify calculation of excise tax or a fine, the SRS must establish that a person is in possession of the goods removed or carried out illegal activities with those goods. Put differently, the fact of goods being placed on the premises of a premises manager does not mean that the manager is in possession of those goods and performs illegal activities with them.
6. FIFTH LAWYER JOINS THE SORAINEN LATVIA TAX TEAM
From 10 August 2009, Latvian certified tax consultant Diāna Kļuškina has become a senior associate with the Sorainen Latvia office. Her key area of expertise is taxation Law and she offers eight years of experience in tax consulting after working with KPMG Baltics as a tax consultant and with Deloitte&Touche as a senior tax consultant. Diāna’s main area of expertise is corporate taxation and other direct taxes, including tax risk assessment, tax planning, transfer pricing, payroll tax, and international taxation, as well as EU law. Before working for the Big Four, Diāna Kļuškina worked for eight years as a senior tax inspector and head of the income tax division of the National Tax Board at the State Revenue Service, also helping to develop draft legislation. Diāna Kļuškina co-authored a tax handbook issued by newspaper Dienas bizness. She has also delivered a range of presentations on tax law and written articles for various publications on business, bookkeeping, and tax law.
7. NEW TAXATION SERVICES
7.1. Sorainen daily tax consultations
Tax law is one of most volatile legal spheres, as reflected by regular editions of Sorainen Tax Newsflashes. By regularly following changes and topicalities in the tax sphere you will save time and tax costs that may also increase if taking into account surcharges. Practice shows that one call to your tax lawyer is often enough to resolve some tax issue. With that in mind, Sorainen has established an offer of “Sorainen daily tax consultations”. This entitles you to:
Two hours’ a month access to consultations with Sorainen Latvia, Estonia, or Lithuania tax lawyers by phone or e-mail on tax-related issues where the law or present practice is unclear or variously interpreted and your company is seeking specialist opinion. We are honoured to share our experience in tax issues by providing consultations at a time to suit you. The service entitles you to advice that does not require significant or detailed analysis by Sorainen tax lawyers and that involves approximately two hours a month in total. Payment for the service is LVL 100 monthly.
Please contact Jānis Taukačs for detailed information and to apply for “Sorainen daily tax consultations”.
7.2. Tax optimisation option and risk identification review
In order to understand the needs of Sorainen clients, to react quickly to tax issues, and to be able to warn of existing tax risks and options to optimise tax payments, the Sorainen Latvia Tax team offers to analyse the client`s business tax optimisation possibilities and risk identification. This service includes discussions with management and accountants to evaluate the client’s tax control system and tax declarations. Initially Sorainen lawyers will spend up to eight hours on examinations and presenting the results.
With a view to successful long-term cooperation, Sorainen is ready to bear almost all the costs of the project. The fee for this service is LVL 200 + a success fee of 10% of tax savings or tax risks identified during analysis. The Sorainen Latvia Tax team believes the fee will be appropriate to the value of services provided and ensuring identification of tax savings or risks. Sorainen will also offer the client tax consultations on how to implement these options and will gladly help introduce them in practice.
Note: this service depends on the Tax team members’ workload and capacity. Please contact Jānis Taukačs for detailed information and to apply for the service.
8. NEW PUBLICATIONS
The Sorainen Tax team has published new tax blogs:
1) “Does your company use all available options to decrease taxes?” (in Latvian) (read here);
2) “The recession we had to have” (read here).