Harmful Tax Practices – 2017 Peer Review Reports on the Exchange of Information on Tax Rulings

Latvia

Latvia has met all aspects of the terms of reference (ToR) for the calendar year 2017 (year in review) except for having in place necessary regulatory framework to exchange information on rulings with countries other than EU Member States (ToR II.5.1) and the timelines by which information on rulings is provided to the Competent Authority for exchange of information (ToR II.5.5). Latvia is recommended to finalise the amendments to their regulatory framework to allow exchange of information on rulings with non-EU Member States under the transparency framework as soon as possible and to reduce the timelines for providing the information to the Competent Authority.

Latvia can legally issue three types of rulings within the scope of the transparency framework.

In practice, Latvia has issued one past ruling;1 for the period 1 April 2016 - 31 December 2016, Latvia issued one future ruling; and for the year in review, Latvia issued two future rulings within the scope of the transparency framework.

No peer input was received in respect of the exchanges of information on rulings received from Latvia.

1. There are 59 past rulings reported by Latvia in the prior year peer review report, however, all 59 past rulings were related to a preferential regime and concerned only Latvian enterprises, i.e. no foreign jurisdictions were involved.

Introduction

728.  This peer review covers Latvia’s implementation of the BEPS Action 5 transparency framework for the year 2017. The report has four parts, each relating to a key part of the ToR. Each part is discussed in turn. A summary of recommendations is included at the end of this report.

A. The information gathering process

729.  Latvia can legally issue the following three types of rulings within the scope of the transparency framework: (i) rulings related to preferential regimes;1 (ii) cross-border unilateral APAs and any other cross-border unilateral tax ruling (such as an ATR) covering transfer pricing or the application of transfer pricing principles; and (iii) permanent establishment rulings. In Latvia, rulings within the transparency framework are issued by the tax control department of the International Transactions Control, Analysis and Methodology Division of the State Revenue Service (the “SRS”). The summaries of these rulings are published in an anonymised way.2

730.  In the prior year peer review report, the information gathering process with respect to past rulings was not assessed as Latvia had indicated that it did not have the necessary legal framework in place for exchanging information on rulings. However, Latvia re-evaluated its legal framework, and has now confirmed that its legal framework does in fact allow for spontaneous exchange of information, and as such the information gathering process has now been reviewed.

Past rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1, I.4.2.2)

731.  For Latvia, past rulings are any tax rulings within scope that are issued either: (i) on or after 1 January 2014 but before 1 April 2016; or (ii) on or after 1 January 2010 but before 1 January 2014, provided they were still in effect as at 1 January 2014.

732.  The SRS has in place a centralised system in which all rulings are registered and monitored in the Latvian Tax Identification system. Given the limited number of rulings issued by the SRS, all tax rulings in scope of the transparency framework were identified manually by the personnel of the SRS, who issue the tax rulings. This involved reading each ruling to determine whether it was within one of the relevant categories, and whether it was issued within the period of validity defined as past rulings.

733.  In order to identify potential exchange jurisdictions with respect to the past rulings, the tax officials responsible for issuing rulings manually reviewed the rulings and the ruling application. The law governing rulings had already required that information on related parties (including immediate and ultimate parent companies) and concerned jurisdictions be included in the ruling application.3 The completeness of this information is verified by the corresponding division’s manager and assigned to a tax inspector who manually analyses the information to ensure that the information is sufficient before issuing the tax ruling. The inspector can also revert back to the taxpayer to request additional information if needed. As such, Latvia was able to identify all potential exchange jurisdictions in all cases without using the best efforts approach.

Future rulings (ToR I.4.1.1, I.4.1.2, I.4.2.1)

734.  For Latvia, future rulings are any tax rulings within scope that are issued on or after 1 April 2016.

735.  In order to identify future rulings, the tax officials who issued the rulings also manually reviewed all rulings in the relevant period to identify if they were in scope of Action 5 and also to identify the potential exchange jurisdictions based on the information provided by the Latvian taxpayer when applying for the ruling, as required by Latvian legislation. The identification of future rulings is done at the point of issuance of the ruling.

Review and supervision mechanism (ToR I.4.3)

736.  Supervisors were instructed to review the work of the tax officials that identified the rulings for the purposes of the transparency framework. The rulings process is carefully documented at every step and Latvia also explains that given the small number of rulings issued, the risk of inaccuracies was reduced because it was able to manually review every ruling issued.

Conclusion on section A

737.  Latvia has met all of the ToR for the information gathering process and no recommendations are made.

B. The exchange of information

Legal basis for spontaneous exchange of information (ToR II.5.1, II.5.2)

738.  Latvia has the necessary domestic legal basis to exchange information spontaneously. Following Latvia’s evaluation of its legal framework, Latvia explains that the Latvian legislation4 does in fact provide a legal basis for spontaneous exchange under the transparency framework, although the existing internal regulations of the tax administration do not permit exchange with jurisdictions other than the EU Member States. Latvia indicates that it is in the process of amending the internal regulations to allow exchange of information with all relevant jurisdictions under the transparency framework, including non-EU jurisdictions. This is expected to be completed by the end of 2018.

739.  Latvia is a party to international agreements permitting spontaneous exchange of information, including (i) the Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (“the Convention”), (ii) the Directive 2011/16/EU with all other European Union Member States and (iii) double tax agreements in force with 61 jurisdictions.5

Completion and exchange of templates (ToR II.5.3, II.5.4, II.5.5, II.5.6, II.5.7)

740.  The SRS has developed a separate Microsoft Word template for internal use, which is completed by the tax officials responsible for issuing rulings. After the template is completed, it is forwarded to the division responsible for the exchange of information. The person responsible for the exchange of information on rulings checks that all required information has been provided, translates the information into English and generates an XML file using European Commission’s (EC) Central Directory. In the future, the SRS plans to use the EC Central Directory’s in-built functionality to prepare XML files to be exchanged with non-EU Member States.

741.  Latvia indicates that so far all exchanges have been made using the EC Central Directory which contains the information in Annex C of the 2015 Action 5 Report (OECD, 2015). In order to complete the summary section. Latvia indicates that they provide all relevant information to assist the receiving tax administration to obtain a general overview of the particular ruling and to risk-assess the potential risks posed by the ruling. When completing the summary section in relation to rulings, the following elements were included: the type of transaction regarding which the agreement is concluded, taxpayer's type of economic activity, the determined comparable unrelated enterprises' operating profit's margin interquartile range, criteria used for the determination of the transfer pricing or the transfer price and other important information depending on the specifics of each particular ruling.

742.  For the year in review, the timeliness of exchanges is as follows:

 

Past rulings in the scope of the transparency framework	Number of exchanges transmitted by 31 December 2017	Delayed exchanges
		Number of exchanges not transmitted by 31 December 2017	Reasons for the delays	Any other comments
	1	0		The exchange covered only EU Member States and was transferred via European Commission’s Central Directory.
Future rulings in the scope of the transparency framework	Number of exchanges transmitted within three months of the information becoming available to the competent authority or immediately after legal impediments have been lifted	Delayed exchanges
		Number of exchanges transmitted later than three months of the information on rulings becoming available to the competent authority	Reasons for the delays	Any other comments
	0	6	Taking into account that the rulings covered only EU Member States, the information was transferred in accordance with Directive 2016/11/EU deadlines.	See below
Total	1	6

 

Follow up requests received for exchange of the ruling	Number	Average time to provide response	Number of requests not answered
	0	N/A	N/A

743.  Latvia explains that the delays in transmitting the information on the past ruling and the future rulings result from the issue of interpretation of the legislation. The exchange of past rulings was completed in 2017 once the legal basis was clarified, as per the below.

744.  The timelines for the process of completing templates and exchanging information on rulings are stipulated in the tax administration’s internal regulations, which are in the process of being amended to comply with the requirements of the transparency framework. Latvia exchanged information on rulings with the EU jurisdictions in accordance with the EU Directive timelines. This means that the information on future rulings issued within the first semester of 2017 would have been exchanged by September 2017, which is later than otherwise would be required under the transparency framework.

745.  Latvia also indicates that information on rulings concerning non-EU Member States will be transmitted immediately after amendments to Latvian tax administration’s internal regulations come into force. This affects two future rulings which will be exchanged with non-EU jurisdictions by the end of 2018.

Conclusion on section B

746.  Latvia has met the ToR for the exchange of information process except having the necessary regulatory framework for exchange with non-EU Member States (ToR II.5.1), and it is applying the timelines under the EU Directive (ToR II.5.5). Latvia is recommended to finalise its amendments to the internal regulations as soon as possible to allow exchange of information on rulings including non-EU Member States and to reduce the timelines for providing the information on future rulings to the Competent Authority.

C. Statistics (ToR IV)

747.  The statistics for the year in review are as follows:

 

Category of ruling	Number of exchanges	Jurisdictions exchanged with
Rulings related to preferential regimes	0	N/A
Cross-border unilateral advance pricing arrangements (APAs) and any other cross-border unilateral tax rulings (such as an advance tax ruling) covering transfer pricing or the application of transfer pricing principles	7	Germany, Italy, Netherlands, Poland, Spain, Sweden
Cross-border rulings providing for a unilateral downward adjustment to the taxpayer’s taxable profits that is not directly reflected in the taxpayer’s financial / commercial accounts	N/A	N/A
Permanent establishment rulings	0	N/A
Related party conduit rulings	N/A	N/A
De minimis rule	N/A	N/A
IP regimes: total exchanges on taxpayers benefitting from the third category of IP assets, new entrants benefitting from grandfathered IP regimes; and taxpayers making use of the option to treat the nexus ratio as a rebuttable presumption	N/A	N/A
Total	7

D. Matters related to intellectual property regimes (ToR I.4.1.3)

748.  Latvia does not offer an intellectual property regime for which transparency requirements under the Action 5 Report (OECD, 2015) were imposed.

Summary of recommendations on implementation of the transparency framework

 

Aspect of implementation of the transparency framework that should be improved	Recommendation for improvement
The tax administration’s internal regulations do not permit spontaneous exchange of information with non-EU countries.	Latvia is recommended to finalise the amendments to the tax administration’s internal regulations to permit exchange of information on rulings with non-EU Member States.
Latvia transmits information on future rulings to EU Member States to the Competent Authority at six monthly intervals each year, to align with the EU Directive deadlines, which is longer than necessary.	Latvia is recommended to reduce the timelines for providing the information on future rulings to the Competent Authority.

References

OECD (2017), BEPS Action 5 on Harmful Tax Practices – Terms of Reference and Methodology for the Conduct of the Peer Reviews of the Action 5 Transparency Framework, OECD/G20 Base Erosion and Profit Shifting Project, OECD, Paris. www.oecd.org/tax/beps/beps-action-5-harmful-tax-practices-peer-review-transparencyframework.pdf.

OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris. https://doi.org/10.1787/9789264241190-en.

OECD/Council of Europe (2011), The Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol, OECD Publishing, Paris. http://dx.doi.org/10.1787/9789264115606-en.

Notes

← 1.  With respect to the following preferential regimes: (1) Shipping tax regime and (2) Special economic zones (regime related with the taxpayers investments in special economic zones and free ports)

← 2.  Available at: www.vid.gov.lv (accessed 20 November 2018).

← 3.  The Cabinet of Ministers Regulations and Administrative Procedure Law.

← 4.  Section V of the Cabinet Regulations No 1245 dated 5 November 2013.

← 5.  Parties to the Convention are available here: www.oecd.org/tax/exchange-of-tax-information/convention-on-mutual-administrative-assistance-in-tax-matters.htm. Latvia also has bilateral agreements with Albania, Armenia, Austria, Azerbaijan, Belarus, Belgium, Bulgaria, Canada, China (People’s Republic of), Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, Former Yugoslav Republic of Macedonia, France, Georgia, Germany, Greece, Hong Kong, Hungary, Iceland, India, Ireland, Israel, Italy, Japan, Kazakhstan, Korea, Kuwait, Kyrgyzstan, Lithuania, Luxembourg, Malta, Mexico, Moldova, Morocco, Netherlands, Norway, Poland, Portugal, Qatar, Romania, Russia, Montenegro, Serbia, Singapore, Slovenia, Slovak Republic, Spain, Sweden, Switzerland, Tajikistan, Turkey, Turkmenistan, Ukraine, United Arab Emirates, United Kingdom, United States and Uzbekistan.

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