Read in Latvian
The rules governing the application of the CIT Act state that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations may be used for Latvian TP purposes.
Latvian law requires that related-party transactions should be arm’s length. In other words, the conditions made or imposed between two related enterprises in their commercial or financial relations must not differ from those that would be agreed between independent enterprises engaging in similar transactions under similar circumstances.
A tax audit may examine and adjust the price of a transaction in the following circumstances:
A transaction between related parties;
Barters and setoffs;
A price deviation exceeding 20% of prices the taxpayer has applied to similar goods or services over a short period;
Exports and imports.
The arm’s length requirement primarily applies to transactions between two or more related companies. Latvian legislation also requires that the taxpayer should adjust his taxable income for the difference between the price applied in a transaction and its arm’s length price if the transaction involves –
individuals related to the company;
related foreign companies;
companies exempt from CIT or enjoying CIT relief under other Latvian laws;
a Latvian related company with which it forms a single tax group; or
a company located in a jurisdiction with a more favourable tax regime.
This provision may apply to any transaction, including purchases and sales of fixed assets and goods, supplies of services, loans and borrowings, and intellectual property. It is possible to use corresponding adjustments and adjust taxable income if a related party has made adjustments to its income according to TP rules. This is possible only if the related party is registered in the EU or a country that has an effective DTT with Latvia and if documentary evidence from the foreign tax authority is received.
Latvian taxpayers who enter into transactions with any of the parties listed above and whose annual revenue exceeds EUR 1,430,000 and related-party transactions reach or exceed EUR 14,300 are required to prepare TP documentation for transactions exceeding the statutory limits.
Within one month after receiving a request from the SRS, the taxpayer must submit full TP documentation containing the following information:
Industry analysis giving a general overview of the industry in which the taxpayer operates;
Functional analysis giving information on the related parties’ functions, risks, and assets; and
Economic analysis, including –
- a description of how the TP method was selected, and
- a benchmarking study.
While the full TP documentation requirement applies to entities exceeding the statutory limits on revenue and annual related-party transactions, other entities will still be required to prove that their TP is arm’s length. Normally, the SRS expects taxpayers to be able to demonstrate which TP method is used and how it is applied (i.e. a benchmarking study of third-party comparables showing that the prices applied by the taxpayer fall within the arm’s-length range).
Latvian taxpayers can apply to the SRS for an Advance Pricing Arrangement (APA). The APA is an administrative instrument issued by the SRS to address a taxpayer’s request for establishing TP conditions and methodology in his related-party transactions for a maximum period of three years.
This option is available to companies whose annual transactions with foreign related parties are expected to exceed EUR 1,430,000.
An APA application fee of EUR 7,114 is payable to the SRS as follows:
20% on submitting the application to the SRS;
80% after the SRS issues an official decision to initiate an APA with the taxpayer.
If the SRS refuses to initiate an APA with the taxpayer, the SRS reserves the right not to refund the 20% down payment.
PricewaterhouseCoopers has been advising its clients on TP matters for several years, including the development of corporate TP policy and documentation according to Latvian and international statutory requirements, and we have accumulated both knowledge and practical experience in these matters.