Dear clients and cooperation partners,
In this Tax Newsflash, we continue providing information on changes to Latvian tax laws. This time, we explain news on value added, real estate and excise taxes plus corrections to tax treaties. The SORAINEN news section covers the most recent publications by lawyers from the Tax & Customs Team.
- VALUE ADDED TAX (VAT)
- REAL ESTATE TAX (RET)
- EXCISE TAX (ET)
- TAX TREATIES
- RECENTLY PUBLISHED BY THE SORAINEN TAX & CUSTOMS TEAM
1. VALUE ADDED TAX (VAT)
New directive on procedure for issuing VAT invoices
These significant changes will affect almost everybody, although not so soon – European Union (EU) Member States must implement the directive by 31 December 2012. This is useful because it will allow businesses to prepare in time and adapt their IT systems.
On 13 July 2010, Council Directive 2010/45/EU determining a procedure for issuing VAT invoices was adopted. The most significant novelties include:
- The cash accounting measure (that is, VAT is payable to the state budget after receiving payment from the buyer, rather than after issuing the invoice) allowed in some EU Member States will apply in all Member States. Moreover, this principle will be available for application by all micro-enterprises with annual turnover up to EUR 2 million. Here, it is not clear whether Latvia will be obligated to extend the limits of cash accounting measure application because at present in Latvia it can be applied if the value of taxable transactions in the previous year did not exceed LVL 70,000 (approx EUR 99,600).
- An invoice should indicate the date when the VAT becomes payable instead of the delivery date. This is necessary to have the same month when a buyer and a seller in different countries have the transaction in their VAT returns.
- Those who are registered as VAT payers in several countries will find it important that the directive will unify requirements for VAT invoice criteria throughout the EU.
- Requirements are harmonised regarding invoices for exempt transactions, terms of issue, summary invoices, issue of invoices to oneself and receipt outsourced invoicing services.
- It will be possible to issue an invoice to any customer (natural person) in a simplified form irrespective of the amount because the consumer cannot deduct the input tax. At present, cash register receipts are usually issued to natural persons. Simplified invoices currently can be issued only in domestic transactions where the value of VAT is less than LVL 100 (approx EUR 142).
- In B2B transactions (supplies to businesses), it will also be permissible to issue a simplified invoice as a credit invoice for inland exempt supplies.
- It is extremely important that an electronic invoice will be equally valid as a paper invoice. The requirement for an e-signature on an e-invoice is thus abolished. At present, a problem still exists with the outdated requirement of the law that a client should agree to an electronic invoice. Thus this law must be amended so that it does not contradict the new directive.
- Invoices will have to be stored for six years. Paper invoices can be scanned and stored electronically. At present, the law requires storage of documentation for only five years.
Therefore amendments to the VAT Law may soon be expected covering the procedure for issuing a VAT invoice. Alternatively, the amendments could be implemented in the upcoming new VAT Law.
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2. REAL ESTATE TAX (RET)
2.1. “Agricultural land” defined more precisely
As of 1 January 2010, amendments came into force applying 3% RET to “uncultivated land usable for agriculture” meaning so far all land that is not used for producing or growing agricultural products. On 21 July 2010, amendments to the law came into force specifying that in future land intended as “land usable for agriculture” will be regarded as uncultivated (so that the 3% tax rate will apply) if:
- until 1 September of each year
- more than 70% of the area of land usable for agriculture in a unit of land
- is not used for producing or growing agricultural products
- or the same area of land is not maintained in a good agricultural and environmental state.
2.2. Limitation of RET scope also refers to 2011
Amendments to the law state that in 2011, after updating the real estate cadastral value the RET (if the purpose of real estate use does not change) for each unit of land and each building separately may not exceed the RET calculated for the previous year by more than 25%.
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3. EXCISE TAX (ET)
3.1. ET on natural gas valid for just two months
As of 1 July 2010, natural gas supplied to end users is subject to ET. Also the Cabinet of Ministers Regulations No 577 “On Natural Gas Circulation and Procedure for Application of Excise Tax” then came into force. However, the application of those provisions has been postponed as of 1 September 2010 to 1 July 2011. Then the ET will amount to LVL 15.6 for 1,000 m3.
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4. TAX TREATIES
4.1. Corrections approved to OECD Tax Convention Model and its Commentaries
Although Latvia is not an OECD member state and it is not bound by the OECD Tax Convention Model and its Commentaries, upon entering into tax treaties with other countries Latvia normally follows the OECD Tax Convention Model and its commentaries. The model convention and its commentaries can help understand the meaning of tax treaty norms.
On 22 July this year, the OECD Council approved corrections to the OECD Tax Convention Model and its Commentaries. The main corrections are:
- The Model Convention contains a completely new wording of Article 7 and its commentaries in relation to taxing income of a permanent establishment. Despite the new wording of the article, its application will not differ much from application under the OECD Tax Convention Model and its Commentaries for 2008.
- Granting of treaty benefits with respect to income of Collective Investment Vehicles.
- Application of tax treaties to state-owned entities, including Sovereign Wealth Funds.
- Tax treaty issues related to common telecommunication transactions.
- Revised changes to the Commentary with regard to the 183-day rule. The changes include two examples to clarify that the period in which a person is a tax resident in the country of activity should not be taken into account for the purposes of the 183-day rule.
4.2. Amendments to OECD Transfer Pricing Guidelines approved
On 22 July 2010, the OECD Council approved the 2010 version of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations. The new version of the Guidelines contains reviewed Chapters I-III related to comparability and profit methods undertaken by the OECD. The new guidance was developed on:
- selection of the most appropriate transfer pricing method to the circumstances of the case;
- practical application of transactional profit methods (the transactional net margin method and the profit split method); and
- performance of comparability analyses.
Under the respective Cabinet Regulations, the OECD Guidelines can be used on applying methods for determining market price. Thus Latvian regulatory enactments recommend substantiating transactions between related parties by following the requirements of international practice. Documenting validity of transaction prices is one of most inspected fields in tax administration audits in many European countries. Therefore we recommend preparing documentation on prices in transactions with related parties while the number of SRS audits in Latvia in this field is not so extensive (although it is growing).
4.3. Review of EU requirements for documentation on transaction prices with related parties
For a document compiling answers from the tax authorities of all the EU Member States on how far each State is in implementing TP documentation requirements in its domestic tax law, please click here. In that document the Latvian SRS commented that “In addition to general provisions on documentation of transactions for tax purposes, the plan is to implement special rules in our laws on transfer pricing documentation. In order to facilitate application of the Code of conduct, the SRS has issued a recommendation on documentation that may be provided by taxpayers to prove that transactions between associated enterprises are concluded at a price which is set at arm's length; it is available in Latvian” here.
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5. RECENTLY PUBLISHED BY THE SORAINEN TAX & CUSTOMS TEAM
- Partner Jānis Taukačs’ article “The new VAT Law is necessary, but still must be improved!” (magazine Bilance), latest blogs “VAT refund procedure generally found to comply with the Constitution”? The dispute was not about that!” and “Why is an application to SRS suddenly needed for VAT refund?” (portal Db.lv) and comments in articles “Reserves of accumulated bad debts will not be taxed” and “Higher minimum salary is wanted for the risk professions” (newspaper Dienas bizness) in Latvian.
- Senior associate Diāna Kļuškina published an article in portal iFinanses.lv (in Latvian): “Expenditure on employees, consumption and tax aspects”.
- Jānis Taukačs and Diāna Kļuškina: interview in the magazine Bizness&Baltija (in Russian): “Charity released from tax”.
All these publications plus the archive with previous SORAINEN tax publications are available here. |