Amendments to the Law "On Taxes and Fees", which entered into force on August 5, 2021, granted the State Revenue Service the right to publish on its website information about taxpayers - legal entities, in respect of which violations of tax and customs laws and regulations have been found. Publishing such decisions to merchants and also caused a controversial assessment in the legal community, because previously such information was not allowed to be disclosed without the consent of taxpayers. Can it be concluded that such openness has already achieved the goal - to promote the safety of the business environment, fair competition and willing fulfillment of tax obligations, as well as - or themselves Did the entrepreneurs learn any useful lessons and learn from the published information in their future commercial activities?
An interview with Dainis Vodolagins, senior tax project manager at BDO Latvia.
Almost a year and a half has passed since the adoption of the amendments to the law, which allowed the State Revenue Service (SRS) to publish important tax decisions for the public. The legislator and SRS expressed hope that it will help even in reducing the shadow economy, but lawyers are concerned about the impact on the business environment in Latvia. Can you draw conclusions about what has come true and what hasn't? What overall impact has the new regulation created?
The issue is very multifaceted, it cannot be judged from only one point of view. The adoption of the amendments forced the SRS to express positive considerations, believing that it will help meet two needs at the same time - both the public's need for information and improving the overall culture of tax payment. The answers to this will be able to be evaluated in a longer period of time than the last year and a half, because currently there seems to be a very long way to go to improve the culture of paying taxes.
One of the aspects that the SRS emphasized in connection with the adoption of the amendments is the ability to defend itself against unjustified accusations by businessmen, publicly expressing their arguments on specific tax matters. The package of amendments included changes in two aspects - not only regarding the publication of general decisions, but also the possibility of publishing information and the opinion of the SRS on cases in which taxpayers believe that the SRS has acted inadequately and publicly expressed information about the service's actions.
When adopting the new regulation, businessmen expressed concern about how it would affect the reputation of merchants. Are these concerns overblown? Do the publicly available decisions of the SRS generally have such a wide audience, are they read by so many people, that it significantly affects the reputation, the unflattering information also reaches its customers?
Such a database of SRS decisions is interesting for a narrow circle of people - people like you (journalists), people like me (lawyers, tax specialists) and, perhaps, financial directors and businessmen to check once or twice a year whether one of their business partners is not in this database and is not considered risky. However, it is absurd that the said database also includes decisions, for example, on the refusal of a refund of value added tax (VAT) in the amount of 40 euros. Right next to it is a refusal for an amount of over ten thousand euros... It all gets mixed together.
Do you think that a threshold should be set, from which amount it would be socially important to make such decisions public?
In my opinion, it is not in the interest of the public to know that some taxpayer did not get back 40 euros from the state budget for some reason. At the same time, his name is included in the database, and if he wants to attract investors or do some other business, any professional who will do an in-depth study of this company will know that he is on this list, and this will have a certain impact on the company's reputation.
Aren't investors digging in, sorting these things out? Just notice that the company is on the list, without evaluating why, for how important facts it is placed there?
Evaluate, however, this means that clarification is required. Before buying a company, in-depth research is usually carried out, during which future investors evaluate all potential risks.
This means more work for tax advisors too!
The question is whether this was really the purpose of the law - to provide more work for tax consultants. It is also not clear what the legitimate purpose is for such a simple public availability of data. For context, it can be mentioned that user authentication is required for access to the beneficial owner database information in Latvia, and the judgment of the European Union (EU) Court of November 22 of this year1 provides that situations where access is possible without authentication and justification, as in the case of the Luxembourg case, do not comply with the EU for the stated purpose, therefore the directive is repealed in this part. So far, I have not found any EU country that has such a practice of publicizing the decisions of the tax administration. In any case, there are none in Lithuania and Estonia, nor in Poland.
Are there really no benefits to the adopted changes?
I have a feeling that this is such a "shaming board". It was necessary to seek a greater balance between the public availability of data and the right of entrepreneurs to data confidentiality and information protection. I believe that the availability of information and the transparency of data have a positive effect on both the correctness of tax payment and the submission of reports, however, I see the need to evaluate the public interest and the confidentiality of information from the point of view of entrepreneurs.
How could this balance be achieved?
Those who use the database should indicate the legitimate purpose for access, justify why they are looking for information about the particular legal entity. A business could be found by its name and registration number, rather than the way it is now when everyone is listed in sequence.
It turns out that more than a year has passed since the changes took effect, but we are still theorizing about the same risks that were mentioned before. During this year and a half, have there been any precedents, complaints from clients, entrepreneurs, about situations in which these risks have materialized in practice? For example, has an investor refused a deal because he looked at the SRS decision database or something like that?
Such complaints have not been heard. Entrepreneurs are reluctant to talk about such situations, because it means that the company has not been able to fully fulfill its tax obligations. The priority is to resolve the issue at hand, not to complain. I have not heard any concerns about the fact of publication from the companies that have made it to this list. I'm talking more about the essence of the matter itself.
Before the introduction of the new norms, there was an assumption that it could also contribute to the number of appeals of SRS decisions and legal proceedings. Are such trends noticeable?
Most of the tax audit decisions included in the database have been appealed. On the other hand, the majority of VAT refund refusals remain uncontested.
How can this be explained? Why are tax audit decisions appealed, but not VAT refund decisions? Is the additional calculation more "painful" than not recovering the tax? Are there smaller amounts in the second case?
It depends on the nature of each specific case. In the case of VAT refusals, the SRS practice is to treat regulatory acts according to the letter of the law. In the SRS's understanding, the "spirit" of the law means to always achieve the payment of taxes, but when the entrepreneur has valid reasons why he missed the deadline for the VAT recovery application, the situation is no longer considered on its merits, because the deadlines have passed and procedurally it is no longer possible to refund anything.
Why do companies miss these deadlines, do not submit justification documents on time?
Various changes in the regulatory framework have been adopted in recent years, and most of them are of international origin. For example, special VAT payment regimes for distance trade, digitally provided services. All these regulations are quite complex, there are possibilities of interpretation. If we talk about direct taxes, for example corporate income tax (CIT), the Council of the EU has just approved the so-called Second Pillar, which introduces a minimum profit tax in each member state and which must be implemented in national law by the end of next year.
Let's clarify - this will not apply to all, but only to especially large companies, of which there are only a few in Latvia?
This will apply to companies whose annual turnover exceeds 750 million euros. It will also affect the subsidiaries of such international conglomerates in Latvia, and there are enough of them here. In Latvia, as is known, since 2018 there has been a zero interest tax rate for CIT if no profit is distributed. This means that our local regulation is in conflict with the Second Pillar, so Latvia had to develop separate regulations that provide for the calculation of the intended tax in the amount of 15 percent. The companies that will be affected will have to be able to book all this, keep track of how much tax would have been paid, do a reverse analysis to understand whether or not the effective rate was lower than 15 percent.
Okay, but this one is more about the future. However, it has already been concluded from the existing published decisions of the SRS that one of the biggest calculations is still for the CIT... What is the "stumbling block" if, as we have already discussed, the very liberal zero interest rate regulation has been in force since 2018? Are they non-business transactions or something else?
Quite a few decisions have been published on CIT. Most of them are VAT, accounting issues. Decisions on CIT still refer mostly to the previous period, before the 2018 tax reform. These are decisions on related party transactions, transfer prices. On the other hand, for transactions that are not related to economic activity, entrepreneurs are smart enough to book such transactions accordingly, inconsistencies in this area could only be discovered in an audit. I think that this practice is less common now than before, because then the consequences were lighter. These amounts could not be deducted for tax purposes, which only indirectly increased the tax liability. There are cases when payment was made for goods that were not delivered, where both CIT and VAT consequences arise, but again - the question is, to what extent is it the entrepreneur's responsibility that the goods were not delivered to him?
What about labor tax issues? Are they mostly suspected envelope salaries?
One issue is the wage level, which has historically been low for some companies. Currently, there are further amendments to the law that provide the SRS with the right to calculate additional taxes if the company cannot justify why the salary of its employees is significantly different from the average salary in the industry. In principle, this was also possible until now, but now it will even be written into the law.
Interesting... It has not been heard that business organizations would protest against it, raise public alarm.
The draft law is currently only at the consideration stage. The second aspect is fictitious employment, when employees are still registered as self-employed, and in this way the company saves on mandatory state social insurance contributions.
We talked about cases of deliberate tax evasion, but maybe there are other examples where companies simply made a mistake, were careless, did not want to be malicious tax evaders?
Errors will gradually be eliminated, but the focus should be on the implementation of the one stop shop (OSS) principle in the EU e-commerce field, which gives the opportunity not to register in each individual member state to pay VAT. If the company does not use the OSS principle, misunderstandings can arise when the tax administrations of several countries consider the place of provision of services or supply of goods to be their territory, and both expect tax from the company. Secondly, it should be taken into account that any corrections to submitted declarations attract the attention of SRS employees. Therefore, the internal processes in the company should be adjusted in such a way that there is as little as possible the need for correcting the documents submitted to the SRS. Of course, transfer pricing will always be a topical issue for everyone who conducts transactions within the group of companies.
Sometimes there are also problems with timely registration in the SRS VAT payer register. What is the basis for this - companies do not notice that transactions have exceeded the set threshold of 40,000 euros?
Rather, the problem is that entrepreneurs believe that the obligation to register in the register of VAT payers arises only if the threshold of 40,000 euros is exceeded during the last 12 months. However, this is not the only case where registration is required. For example, a lower registration threshold (sometimes the obligation to register arises starting from 10,000 euros) is set for cases where services are purchased from other member states or when electronic communication, broadcasting and electronically provided services are provided. Also, a special procedure is established in transactions with real estate - the company that takes over this property, even before it provides any services, must have a VAT number. Also, in such transactions, it is important to understand what kind of real estate - new or used - is being traded, as the regulation and the resulting consequences are different. You should also remember to submit a notification to the SRS that the real estate will be under the control of another company and in the future this new company will submit reports on the use of the real estate and the possible input tax correction.
One of the positive assumptions about the consequences of publicizing SRS decisions was that it could improve, make more thorough the SRS's own approach to decision-making. Has the awareness that a public justification will have to be provided reduced the number of hasty, insufficiently substantiated SRS decisions?
Hopefully, it will gradually happen... especially after the recent publicized events and with a new leadership of the SRS.
In the context of the recent events related to the SRS - can it not be the case that, for an additional audit or unjustified calculation, the publication of such decisions can also be used as an additional tool to extort money from companies? If we remember, once upon a time in the case of "Dobeles zirnavniekas" a special press release was even sent out, in which it was publicly announced that as a result of an audit, the company in the grain industry had been charged in the amount of several million euros.
Even a good tool aimed at promoting a culture of openness and tax payment can be misused. The very fact that they ended up on such a public list could certainly be very unpleasant for some companies. This may lead some entrepreneurs to think that Latvia is not the best place to do business. Of course, you can already say that "we don't need dishonest taxpayers", but not in all cases taxes are not paid on purpose. There are situations when it just happened, mistakes were made. Looking at such a list, where everything is thrown together, it is impossible to understand which company did not pay taxes maliciously, which one - it happened by accident.
Source: Bilances Juridiskie Padomi