Latvian transfer pricing laws are aligned with the Guidelines set by the Organization for Economic Co-operation and Development (OECD), and incorporated within the Corporate Income Tax Law (CITL) and Rules on the Application of the Corporate Income Tax Law (The Rules).
Arm’s Length Principle
CITL stipulates that the taxable base for enterprise income tax includes any income that a taxpayer should have received if their transactions were conducted under fair market conditions between independent parties, as well as any expenses that a taxpayer should not have incurred under those same conditions. This applies when transactions occur between related parties, where one is the taxpayer, and the transaction values do not correspond to market prices. The principle applies to a domestic company’s transactions with foreign-related companies; any company located in a blacklisted low-tax jurisdiction; any domestic company if transactions take place within a single supply chain with a foreign-related party; and related individuals.
Related Party Definition
Related persons are individuals or companies that have a financial or managerial connection. This does not apply to companies fully owned by the State or local government. A relationship is considered “related” if at least one of the following conditions is met: one company is a parent or subsidiary of another; one company owns between 20% and 50% of another but does not have control over voting decisions; a single person or their close relatives own more than 50% of multiple companies or have control over them; a group of up to 10 people jointly owns more than 50% of multiple companies; a company is controlled by another company in which a single person or their close relatives own more than 50%; the same people control the boards of multiple companies; companies have secret agreements or cooperate to reduce their tax burden; or a person or their close relatives own more than 50% of a company’s shares or have decisive control over it.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Latvia are:
- Comparable Uncontrolled Price Method
- Resale Price Method
- Cost Plus Method
- Transactional Net Margin Method
- Profit Split Method
Latvia legislator has regulated the selection of the method based on the “Most Appropriate” principle. Factors taken into consideration include functions performed, risks involved, reliable data availability, and the comparability of financial information from similar transactions or independent parties, including necessary adjustments.
Comparability Analysis
Latvia’s jurisdiction follows the guidance on comparability analysis outlined in Chapter III of the OECD Transfer Pricing Guidelines (TPG). This means the rules and methods for comparing transactions between related and unrelated parties are aligned with these guidelines. There is a preference for using domestic comparables over foreign ones, as domestic comparables are often seen as more relevant to the local market conditions and therefore more reliable for assessing transfer prices.
The tax authorities do not use secret comparables when evaluating transfer pricing. This means they do not use hidden or undisclosed data for their assessments. Neither does the legislation allow or require using an arm’s length range or statistical measures (like averages or medians) for determining fair compensation. Instead, the focus is on looking at specific comparables.
Documentation Requirements
Transfer pricing documentation requirements in Latvia are based on the three-tiered approach set forth by the OECD. This requires multinational groups to submit the following documentation to the Latvian tax authorities:
- Master File;
- Local File, and
- Country-by-Country (CbC) report.
Master & Local File
Latvian taxpayers must prepare transfer pricing documentation, including a master file and/or a local file, based on OECD Guidelines if certain transaction thresholds are met. If transactions with a foreign related party or a company in a black-listed jurisdiction exceed 15 million euros, or net sales exceed 50 million euros with transactions over 5 million euros, a master file must be submitted within 12 months after the tax year.
A local file is required if transactions exceed 5 million euros. If these thresholds are not met but transactions exceed 250,000 euros, documentation must be prepared and submitted within a month if requested by tax authorities. For Latvian-related parties, only a local file is required for transactions over 250,000 euros, and it must be submitted within 90 days upon request. Simplified documentation is allowed for low-value transactions under 250,000 euros.
Country-by-Country Reporting
Latvian multinational enterprises (MNEs) with consolidated revenues over 750 million euros must submit CbC reports. Also, if companies headquartered abroad don’t have to report or if the cross-exchange of these reports doesn’t work out right, a subsidiary in Latvia might still end up having a report to turn in. This follows guidelines and directives from both the OECD and the EU for CbC reporting.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Advance Pricing Agreements (APA)
To prevent and resolve transfer pricing disputes in Latvia, several mechanisms are available, including requesting binding rulings from the tax administration, applying for Advance Pricing Agreements (APAs), and utilizing Mutual Agreement Procedures (MAP). Taxpayers can also engage in unilateral, bilateral, or multilateral APAs to resolve issues related to arm’s length pricing. Additionally, cross-border dialogue can be used to resolve disputes between countries. These mechanisms aim to provide clarity and agreement on transfer pricing practices between taxpayers and tax authorities.
Mutual Agreement Program (MAP)
An APA (Advance Pricing Arrangement) is an agreement that sets the rules for determining transfer pricing (the prices for transactions between related companies) in advance. It includes criteria like the method, comparisons, adjustments, and assumptions for future events, covering a set period. Sometimes, issues resolved by an APA may affect previous tax years not originally covered by the agreement.
Approach to Transfer Pricing Audits
In Latvia, small taxpayers face a medium risk of being audited, while medium and large multinational companies have a high risk. During audits, there is a medium risk that the TP method will be questioned, which could lead to adjustments. The tax authority – State Revenue Service (SRS) may also focus on factors like persistent losses, payments to low-tax jurisdictions, or changes in the TP model. According to Latvian law, the SRS can review controlled transactions for up to five years after taxes are due, so companies must keep records for at least five years after submitting their corporate income tax return.
Penalties
The tax authority can fine a taxpayer up to 1% of the amount related to a controlled transaction if they fail to submit transfer pricing documentation on time or if the documentation is incomplete or incorrect. The fine cannot exceed EUR 100,000. This applies when it’s impossible to verify if the transaction price is in line with market values due to poor documentation.
Taxation at a Glance
Latvia’s tax system is based on separate laws for each type of tax, such as income tax, VAT, and excise duties. Corporate and personal income taxes are national taxes, with different rates for various income types. Since 2018, Latvia has a progressive personal income tax and exempts corporate taxpayers from income tax on reinvested profits. Nonresident companies are taxed only on Latvian-source income. Special indirect taxes also apply, such as VAT, customs duties, and excise taxes.
In Latvia, the currency is the Euro (EUR). The official name of the Latvia tax authority is the State Revenue Service.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 25% |
VAT | 21% |
Withholding tax on dividends to non-residents | 0% |
Withholding tax on interest to non-residents | 0% |
Withholding tax on royalties to non-residents | 0% |
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