In early 2024 the State Revenue Service (SRS) published an advance tax ruling issued to a foreign company’s permanent establishment (PE) in Latvia, in which the SRS assessed the PE’s relationship with its foreign head office and explained whether the PE is liable to prepare and submit a transfer pricing (TP) file for their mutual transactions. In this article we outline what the tax ruling says about PE status, examine Latvian TP rules on documenting relationships and TP, and offer a theoretical example to explain the PE’s obligation to document TP in practice.
Since the current Latvian transfer pricing (TP) rules came into force back in 2018, companies are used to preparing and submitting a TP file in the second half of the current year. For most taxpayers, the financial year is the calendar year, which in conjunction with the TP rules means a TP file for the previous financial year must be submitted by 31 December of the current year.
Communicating with the State Revenue Service (SRS) is certainly the safest way to make sure the interpretation of law we use daily complies with how it was originally intended. Most of the guidelines published by the SRS explain clearly how statutory requirements should be applied. Yet the 2019 guidelines on transfer pricing (TP) documentation offer a formula for computing the amount of a controlled credit-line or cash-pool transaction made in the financial year that gives the taxpayer much more room for interpretation. This alternative formula became the subject of debate again in recent communication between TP professionals and the SRS.
The first year of audit has ended since insurance and reinsurance companies and foreign insurers’ branches started preparing their accounts and consolidated accounts according to International Financial Reporting Standard No. 17, Insurance Contracts (IFRS 17) with significant amendments. The new approach to measuring income from insurance contracts has transformed taxpayers’ accounting records and affected their transfer pricing (TP) policies. As the deadline for submitting TP files for FY23 is approaching, it’s time to assess how IFRS 17 affects insurers’ transactions with related parties.
As technologies keep evolving, we often hear about new tools of artificial intelligence, business intelligence, data processing, analysis or visualisation and the opportunities they offer. These technology solutions can help companies make fast and efficient decisions and manage their processes transparently. Transfer pricing (TP) has been evolving in this respect as well. The opportunities offered by various technology tools can help companies standardise, automate and rationalise their processes associated with TP management and compliance, an area known as operational transfer pricing (OTP). This article explores what the new concept means and what opportunities it offers.
In our Flash News edition of 22 November 2023 we wrote that a Latvian company doing business with unrelated parties that are based, formed or established in low-tax or tax-free jurisdictions (‘tax havens’) may be liable to prepare and submit to the State Revenue Service (SRS) a local file and a master file describing the transfer pricing (TP) methods applied in controlled transactions made by the Latvian company and by the group. With Russia added to the blacklist of tax havens on 1 July 2023, Latvian taxpayers might face difficulties in preparing their TP files because the TP analysis of their transactions is hindered by a lack of information on the unrelated party. In this article we look at the difficulties and possible solutions.
Taxpayers sometimes report an operating loss at the end of the financial year. The State Revenue Service (SRS) perceives this as a key risk that gives grounds for launching a control measure, particularly for taxpayers within a multinational group, citing the transfer pricing (TP) impact on profitability as the main cause of the loss. This article discusses the idea that losses may have an objective economic justification and other legitimate business strategy reasons, with associated risks materialising in the financial year, as well as looking at ways to offer explanations and dispel the myth that TP is the cause of the taxpayer’s operating loss.
We have written earlier about the State Revenue Service (SRS) pointing out significant errors in transfer pricing (TP) files and focusing on the lack of financial data segmentation, the tested party or its financial data, and the benefit test (i.e. evidence of services). This article explores some other common breaches.
It’s been a while since the Organisation for Economic Co-operation and Development (OECD) drafted its Pillar I report dealing with various issues around the growing economic globalisation and digitalisation. It’s also increasingly difficult to determine countries’ rights to charge corporate income tax on the profits of multinational enterprise groups. While the project is basically geared towards digital business, one of the solutions the OECD offers may simplify transfer pricing (TP) for a particular group of transactions: baseline marketing and distribution activities.
On 22 February 2024 the European Parliament Committee on Economic and Monetary Affairs (ECON) published a draft report that includes proposals for a transfer pricing (TP) directive drafted by the European Commission. The ECON draft report generally supports the Commission’s proposal to align the TP requirements across the EU, yet it recommends a number of crucial amendments. This article explores the ECON amendments that could affect Latvian TP requirements, too.
Recent years have seen the State Revenue Service (SRS) increasingly focus on transfer pricing (TP) risks, particularly management services and business support services rendered within a multinational enterprise (MNE) group. These services between related companies aim to promote a group member’s business, to cut costs it would have incurred in performing the particular functions on its own, or to offer some other comparable benefit from the synergy of doing business together. Yet there is also the other side of the coin – TP and corporate income tax (CIT) risks may arise if the recipient of services is unable to prove they were actually received and the fee was justified.
The European Central Bank (ECB) has been increasing its key interest rates since June 2022 to mitigate the high inflation caused by Covid-19. Taxpayers have good reason to debate whether they should revise the interest rates historically applied in their long-term financing transactions between related parties and apply new rates that are arm’s length and reflect the current economic conditions. This article explores the vision of the State Revenue Service (SRS) and recommendations for mitigating potential transfer pricing (TP) risks.
Setting an arm’s length fee for your intragroup services is one of the transfer pricing (TP) challenges you might face. In 2018 Latvia decided to offer relief for low value-adding services (LVAS) to facilitate this process for companies. If certain criteria are met, LVAS can be analysed under a simplified procedure, meaning the service provider can apply a 5% markup on costs without undertaking a detailed benchmarking study. This article serves to remind you of a key requirement when it comes to taking the simplified approach to LVAS.
We have written before about the profit split method (PSM) and its potential in transfer pricing (TP) analysis, looking at the essence of this method and the scope for using it. This article explores PSM’s advantages and disadvantages.
We have analysed the CIT treatment of doing business with companies on the blacklist of uncooperative tax havens earlier. This article explores new changes to the list and how they affect transfer pricing (TP).
