Pillar Two is a tax scheme that will be applied in the EU and OECD countries in addition to their national corporate tax systems. This was developed to make multinational enterprises pay a minimum 15% tax in their home country on income arising in each country they operate in.

The mergers and acquisitions (M&A) space is justifiably perceived as one of the indicators of economic activity – greater interest in acquiring, merging and investing in companies means more dynamic development of the economy. Compared to recent years, 2021 set a record in terms of number and volume of transactions (up by 48% in the Baltic States) but 2022 saw a slowdown in M&A activity because of geopolitical turmoil. Some transactions are still taking place, while others are put on hold, and the business community is preparing for times that will bring more certainty and stability. Since a successful M&A transaction needs preparation, this is a good time to do the homework while considering the next cycle of economic activity.

Latvian transfer pricing (TP) rules provide that a company’s transactions with related parties must be arm’s length, whether the parties are Latvian or foreign tax residents. The arm’s length principle dictates that a company making comparable transactions under comparable conditions must receive comparable revenue, whether the transaction is with a related or an unrelated party. Basically companies know and understand this, yet there are various facts and circumstances that make this requirement difficult to enforce in real time. This is because before or during the transaction, companies often lack sufficient information on arm’s length prices that unrelated parties apply in comparable transactions. This is where companies can use a TP adjustment, which is not always so painful as it might originally seem. This article explores what TP adjustment a company can make by adjusting its taxable base for corporate income tax (CIT) purposes.