The Cabinet of Ministers’ Rule No. 677  has been amended with effect from 18 February 2021 on ways of applying the profit split method (“PSM”) in analysing transactions between related parties. This article offers a flowchart to help taxpayers evaluate the possibility of using PSM for economic validation of prices applied in their transactions, with a practical example of profit split.

Many multinational enterprises have suffered losses from a drop in demand, a supply chain delay or extraordinary operating costs during the period of Covid-19 restrictions. The allocation of such losses and extraordinary costs between related companies is likely to attract the tax authority’s scrutiny so these issues require special attention. This article explores the allocation of losses and Covid-19 specific costs in the light of the OECD’s Guidance on the transfer pricing implications of the Covid-19 pandemic.

While some taxpayers may face challenges in applying their advance pricing agreements (“APAs”) with the tax authorities under the economic conditions resulting from the pandemic, all existing APAs and their terms should be respected unless a critical assumption is breached. This article provides an overview of how COVID-19 affects APAs in the light of the OECD’s “Guidance on the transfer pricing implications of the COVID-19 pandemic.”

As we carry on exploring the OECD’s Guidance on the transfer pricing implications of the Covid-19 pandemic (the “Guidance”) this article offers an overview of how government assistance programmes affect transfer pricing analysis.

The unique economic conditions arising from Covid-19 and national restrictions have caused certain difficulties in applying the arm’s length principle for transfer pricing analysis. To pick up where we left off in our article Covid-19: transfer pricing impact, this one explores Guidance on the transfer pricing implications of Covid-19 the OECD published in late 2020.

The amended transfer pricing (“TP”) rules effective from 2018 authorise the State Revenue Service (“SRS”) to penalise taxpayers for TP breaches. This article explores when the SRS can impose a penalty and what procedures are in place to keep it in proportion.

An adverse economic environment poses certain difficulties in maintaining transfer pricing (“TP”) policies. However, a global economic crisis does not cancel the requirement that controlled transactions be arm’s length. Following our article on Covid-19 and financial transactions, this one explores some other implications of the pandemic for TP outcomes and provides suggestions for TP analysis.

Before the transfer pricing rules were amended, only a few taxpayers were aware of the significance of financial data segmentation. Once amendments to section 15.2 of the Taxes and Duties Act came into force, preparing financial data segmentation can no longer be seen as a voluntary exercise because from 2018 its inclusion in the transfer pricing documentation is a statutory requirement taxpayers must meet to avoid penalties.

The Cabinet of Ministers’ Regulation No. 210 on the automatic exchange of information on reportable cross-border arrangements came into force on 1 July 2020. The new rules basically require providers of tax, legal and any other type of consulting services who meet the criteria laid down by paragraph 3.5 of the rules, to provide the tax authority with information on any designed, marketed, organised or made available for implementation or manages the implementation a cross-border arrangement between a taxpayer registered in Latvia and a taxpayer registered in another tax jurisdiction known to them. In this article, we explore the hallmarks of cross-border arrangements for transfer pricing purposes and make recommendations that can help taxpayers making cross-border related-party transactions to objectively support their economic substance and avoid concerns about implementing them for aggressive tax planning and profit shifting purposes.

COVID-19 may have a wide range of adverse implications such as falling consumer demand, supply chain disruptions, and heightened risks in financial markets. The economic downturn may result in many companies within a multinational group having lower cash flows, so other group members may decide to lend to them or to revise the terms of their existing loans and help them ride out the crisis. This article explores key transfer pricing issues and risks associated with intragroup financial transactions, which are especially topical in the present emergency situation.

To pick up where we left off, let us now examine the advantages of a cost contribution arrangement (“CCA”) and questions of how to assess its arm’s length compliance, whether the CCA concept is practised in Latvia, and whether the tax authorities allow it to exist. This article explores how the CCA can be used in cases involving the creation and development of intangible property (“IP”).

In recent years, there has been an increasing number of cross-border transfers of intangible property (“IP”) between related parties. Related-party transactions involving IP are usually material and attract scrutiny from the tax authorities. The OECD outlines inappropriate valuation of IP as a key risk related to profit shifting. This article explores general valuation techniques that can be used for determining and defending an arm’s length price in IP transfers between related parties.

A multinational enterprise’s intragroup transactions are not limited to goods and services. The group members can also deal with intangible property (“IP”), for example, transfer IP for a consideration (change of owner), grant the right to use IP in whole or in part, or use various types of agreements for reimbursing IP costs. This article explores IP and relevant agreements as well as the concept and purpose of a cost contribution arrangement.

To pick up where we left off about the final version of the OECD transfer pricing (“TP”) guidelines for financing transactions, this article explores the rest of the conditions to be considered in terms of accurately defining a proposed financing transaction between related parties before setting its price (value). It is necessary to clearly define the transaction itself as well as its substance, purpose and conditions, and whether it meets the criteria for a financing transaction.

On 11 February 2020 the OECD published the final version of its transfer pricing (“TP”) guidelines for financing transactions, a document welcomed also by Latvian taxpayers within multinational enterprise groups, by tax consulting service providers, and by the State Revenue Service. We wrote several articles about the draft guidelines in 2018 so this series of articles will explore some of the changes arising from the final version. We will also look at some global trends and key aspects to be considered in analysing financing transactions according to the OECD recommendations.