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On 21. December 2018 the full package of master file and local file documentation requirements came into legal effect in Latvia. The said requirements, available in English, are a copy and a paste of OECD BEPS Action 13 the recommendations of transfer pricing documentation for multinational enterprises (MNE) operating in Latvia.
In addition, such requirements envisage two specific rules. In case of non-submission tax administration of Latvia (VID) may impose a fine or, in case of audit, VID may use information at its disposal to determine the market value of controlled transaction. What is more, Latvian legislature (Saeima) is in the process of producing law for the regulation of fines for the non-submission of Country-by-country report. The first wave of documentation had reached post box of VID (electronical declaration system, which is available in English) by January 2nd , 2020.
Latvian enterprises and permanent establishments in Latvia which transact with foreign associated enterprises and with persons from offshore listed jurisdictions. In case the sum of such transactions exceeds 5m EUR, a local file shall be submitted, and in case such sum exceeds 15m EUR or such sum exceeds 5m EUR and net turnover of the said Latvian entities alone exceeds 50m EUR, a master file shall be submitted. In other cases, both files shall be submitted to VID on its request.
The deadline for mandatory submission is 12 months after the relevant reporting year, which is usually December 31 (in practice the date is January 2nd, since December 31st and January 1st are public holidays).
First of all, prognosis and critical assumptions upon which transfer pricing methodology is based shall be elaborated in local file. This means that MNE shall consider hindsight (die Nachsicht) risk timely, probably during reporting year on contemporaneous basis. Secondly, for the selection of comparables the screening of each selected or deselected enterprise or transaction shall accompany local file. Consequently, the timing of collection of data becomes more important since the screening shall include screening date.
A fine of up to 1% from the sum of transaction but not exceeding 100 000 EUR may be imposed. While ordinarily VID uses a TP Catalyst data base for that purpose, VID may use local statistical data for benchmarking the profitability of Latvian enterprise or permanent establishment. Meanwhile, the fine for the non-submission of a country-by-country report and non-compliance in respect to preparation and submission of it seems quite generous – the maximum fine envisaged is only 3200 EUR. Non-notification is not punishable according to existing draft law.
The MNE has the right to request a tax ruling before VID for issues MNE considers uncertain, for example, on the mode of calculation upon which the sum of a transaction may be calculated in order to determine whether the threshold of preparation and submission of transfer pricing documentation has been reached. According to public statement of VID, the said mode of calculation, in general, is to sum the amount of a loan received and the amount of recognized interest expense in particular reporting year. For example, if a Latvian company received 4 950 000 EUR loan in 2019 and it recognized interest expense in the amount of 100 000 EUR in the same financial year, the total amount of this transaction is 5 050 000 EUR and, consequently, such Latvian company shall prepare and submit a local file in VID by January 2, 2020.
