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Dear client and cooperation partner,
In this Tax Newsflash edition, we draw your attention to new draft amendments to the VAT Law adopted by the Cabinet of Ministers (CM) and published on its home page on 8 September. The amendments introduce several significant changes to VAT regulation starting from 1 October. The draft is yet to be accepted by the Saeima before coming into effect, but the text most likely will hardly change in comparison with the text already available. The following passages explain what exactly is included in the draft, enabling you to start preparing for changes.
1. LONG-AWAITED GOOD VAT NEWS
The draft bears mostly good news for business although the good news was initially supposed to be doubled. The initial draft contained six so-called optional provisions of the VAT Directive, instead of the following three that have been delivered for the Parliament’s approval:
- option for related taxable persons to unite in a single VAT payers group;
- the right to reduce VAT payable to the State budget by VAT paid on bad debts;
- special tax regime (VAT exemption) on imports of goods.
A more detailed review of each option follows.
1.1. VAT groups
A VAT payers group operates as a single taxable person. Therefore, it does not have to report to the State Revenue Service (SRS) regarding transactions within the VAT group (such a transaction is out of VAT scope). However, purchase or delivery by any member of the group is considered as a purchase or delivery by the group. Therefore, the group will have one VAT number and even one VAT declaration. A VAT group must be specially registered with the SRS under the legal address of the freely chosen main company. The main company is held responsible for the liabilities of the group towards the State. A group is formed by two or more taxable persons in the form of a contract. Here, in relation to the ideal contents of the contract, foreign colleagues’ experience is valuable because VAT groups have existed in many countries for quite a while already.
VAT groups are beneficial not only to make VAT administration easier in a group. The group may also be important if, for example, a group of companies contains enterprises with a large variety of exported products or services, thus accumulating input tax to be reclaimed from the State budget. At the same time, another enterprise of the same group of companies may create products or services with a high added value for the Latvian market thus having a VAT payable to the budget. Then by setting up a VAT group, both enterprises will settle accounts with the state only for the total net balance. In short, the exporting enterprise will gain better cash flow because it will not have to credit the State.
Several other criteria apply for forming a VAT group. Some of most important of these are:
- A VAT group can be formed if the total value of taxable goods and services delivered by at least one member of the VAT group exceeds LVL 250,000 during the previous 12 calendar months.
- VAT group members must be taxable persons.
- The maximum number of members of a VAT group is not limited.
- A taxable person may not be a member of more than one VAT group.
- Members of a VAT group can be:
- companies that belong to one group;
- a branch of a foreign business in Latvia on condition that the foreign business belongs to a group of companies to which the other members of the VAT group belong.
In practice, it is worthwhile emphasising that members of a VAT group continue indicating their individual VAT numbers in transactions. The VAT group number is necessary only for completing the group’s VAT declaration and for payment of VAT. However, each member of the group still will have to file a separate return on input tax amounts and on supply of goods in the EU (Sales list).
Likewise it is important that members of a VAT group are jointly liable. This applies even three years after the group has ceased to exist. Therefore, as it is sometimes said in sports – a group is as strong as its weakest link.
An issue to be most carefully considered with regard to setting up a VAT group will arise where a group member engages in VAT-exempt or partially exempt transactions. One should then calculate whether creating the VAT group is cost-effective. One may also then consider applying a separate or partially separate accounting system for goods and services used for taxable or exempt transactions. The draft law also enables calculation of a proportion both on the level of the group and an alternative – on the level of each member for pro rata actual use by the member. Thus, the most suitable variant must be carefully calculated.
A VAT group contract would have to set a procedure developed by the VAT group and confirmed by its members for calculating and deducting (also pro rata) input tax, as well as a procedure for continuing recording input tax correction for real estate and fixed assets with a value exceeding LVL 50,000.
1.2. Bad debts
After 1 October, it will be possible, on meeting a set of nine conditions, to reclaim (reduce VAT payable to the state) VAT paid to the state on bad debts from unrelated parties, where the debt for one client is less than LVL 300 without VAT. Unfortunately this will be possible only once a year – in the March declaration of the following year. However, the good news is that these norms will refer to debts already appearing from 1 January 2009.
Among the most significant requirements, it should be mentioned that this norm refers to debts that are not older than three years (starting from 1 January 2009) and supplies to the debtor must have been suspended at least six months ago. The claim must not be assigned for the allowance to be applied, and measures for recovering the debt must be proven. Until 1 March of the respective following year (after recovery of VAT), the debtor must be informed that the debt is regarded as a bad debt for VAT purposes.
Amounts exceeding LVL 300 may likewise also qualify for VAT recovery; only in this case a deed must be obtained from a law enforcement officer (court bailiff) confirming that it is impossible to collect the debt, in addition to the above conditions.
Naturally enough, the State does not plan to engage in charity. Thus, the debtor must pay to the State budget the deducted input tax on the basis of a SRS notification no later than July 31 of each following year. Of course, another matter is that these are not called bad debts without reason – the State will have difficulty in collecting deducted VAT from the debtor.
1.3. VAT allowances for import
The last of these three optional provisions will especially please businesses involved in logistics because the norm allows taxable persons not to pay VAT in cases of importing products from third countries. This definitely represents a correct step for Latvia in the direction of development as a transit country because upon increasing the flow of goods through Latvia the amount of customs duty paid in Latvia will increase. Under the previous procedure, until now businesses found it more cost-efficient not to clear products in Latvia, but to send them by internal transit to another EU Member State and clear them there because in many EU countries import VAT has not been payable for quite a long time already. Thus, customs duty (25% of it) was received by another EU Member State. Many importers likewise faced the problem that the SRS used informal reasons in order to keep the deductible (actually paid) VAT.
This allowance allows suspension of payment of import VAT until it is declared in the respective VAT (monthly) return, once a permit from SRS is received. Thus, under this special VAT regime, VAT payers in most cases will settle their accounts with the State budget for the overall results of VAT monthly return and not for a specific transaction. Moreover, as was the case until now for import VAT actually paid, the suspended import VAT will be reflected as both input and output tax in the same VAT declaration, so that in most cases this would not result in the importer’s obligation actually to pay VAT.
The draft law does not provide for any special, unrealistic for usual business requirements for obtaining a SRS permit. A permit will also allow the special import VAT regime to apply if the importer uses, for example, customs broker services for this purpose. Likewise, the plan is that more detailed information about permits will be available in CM regulations. The draft also includes the right to apply these import VAT allowances to persons without having a SRS permit, upon importing their own fixed assets with a value of LVL 500 or more, if they do not plan to dispose of them within the next 12 months.
It should also be noted that failing to indicate VAT on imported products in a monthly VAT return will attract a quite severe fine – 10% of the VAT sum not indicated. Here, however, the legislator would need to differentiate between formal and intentional violations.
1.4. Other significant news
- Positive changes also affect the “general” procedure for VAT registration. Upon registration, a registration certificate will not be issued, but a decision will be sent by mail if the applicant so requires. Thus the VAT registration point will not be the date of issue of a certificate, but rather the seventh day after publishing the decision on the SRS home page or delivery by the post office if the SRS has been asked to send its decision. It has also been determined that a decision on removal from the VAT register comes into force on the seventh day after its dispatch by the post office, but a decision on removal as a result of reorganisation at the moment when the legal person ceases to exist.
- The draft affirms that VAT is not applied to interest if payment for products and services is postponed.
- Notaries will have to re-register from their place of residence to their place of practice.
2. NEW SORAINEN PUBLICATIONS
2.1. Non-resident Corporate Tax payers in Latvia
We draw your attention to the article “Non-resident Corporate Tax payers in Latvia” (in Latvian) by Diāna Kļuškina, a senior associate in the Sorainen tax team. In the extensive article Diāna Kļuškina analyses transactions with non-resident companies and the inaccuracies allowed that result in a Latvian company’s obligation to pay additional tax which should not be paid by correct structuring and preparing corresponding documents. To read the full article, please click here.
2.2. Tax reform efforts hit roadblock
On 23 September The Baltic Times published an article on tax reform efforts in Latvia that includes interview with Jānis Taukačs and Ūve Zosārs (Sorainen Latvia office senior associate). To read the full article, please click here.
2.3. What is happening in tax policy
On 26 August Jānis Taukačs represented Sorainen and the Tax team on one of the most popular Latvian TV-shows – “What is happening in Latvia?” (broadcasted in Latvian). Topic of the show – “What is happening in tax policy?”. To watch the full show, please click here.
2.4. Blogging in local and international media
Sorainen Tax team members (in Sorainen Latvia office – partner Jānis Taukačs and senior associates Edgars Koškins and Ūve Zosārs) are actively blogging in both international and local media. To read the latest blog posts, such as “ECJ allows deduction of VAT by holding companies” (in Eglish) and “What makes Latvia better (worse) than Cyprus?” (in Latvian), please click here.
2.5. Sorainen Tax team on Twitter
Now you can follow the most topical tax news on Twitter in Latvian and in English. |
