In the last couple of months Latvia has signed two new double tax treaties. On 24 May 2016 Latvia signed a tax treaty with Cyprus, while on 13 April – a double tax treaty with Hong Kong. However, in order for the signed conventions to come into force, the treaty has to be ratified by both countries, i.e. in Latvia the Parliament has to approve them. Thus, at this moment the precise date when these treaties will be applicable is unknown.
With regard to the double tax treaty with Hong Kong, we would like to note that, when it will come into force, Hong Kong would no longer be considered an offshore location for tax purposes by Latvia. This would mean that the Latvian corporate income tax payers would no longer be required to withhold 15 percent tax from the payments to companies in Hong Kong.
The largest beneficiaries from the double tax treaty with Cyprus will be companies receiving management and consulting services from Cyprus residents. With a residence certificate of the service provider, they will be able to apply the treaty exemption and not withhold 10% from the service fee.
On 31 May 2016 the Cabinet of Ministers accepted the draft law “Amendments to the Valued added tax law” (hereinafter - the Amendments), which intends to extend the application of the reverse charge mechanism for value added tax (hereinafter - VAT). According to the Amendments, VAT on supplies of crops and industrial crops, including wheat, rye, barley, oats, corn, buckwheat, triticale, soy beans, linseed and rapeseed or turnip rape seed, will need to be calculated and declared by the buyer of these products rather than the supplier. The draft law states that the Amendments are to enter into force on 1 July 2016.
This decision was made to limit the opportunities to conduct fraudulent transactions. It is a common practice in grain purchases to set up a string of transactions involving a multitude of intermediaries some of which do not pay VAT to the national budget. As a result, the State Revenue Service would prohibit the final buyer, a large grain processing or exporting entity, to deduct input VAT on the grounds that VAT was not paid in some earlier stages of the supply chain, although these large entities never intended to be part of a VAT fraud scheme. These arrangements imply that the final responsibility for paying VAT is passed onto the final crop buyer, the entity from which it is feasible to collect the tax. Under the impact of countless tax disputes it was found necessary to amend the application of this tax.
The introduction of the reverse charge mechanism will make it harder for dishonest intermediaries to commit VAT fraud, and easier for crop processing or exporting entities to recover input VAT.
It must be pointed out that the new mechanism will have a material impact on the cash flow of crop producers as VAT no longer will be collected upon the sale of crop. These companies will constantly have overpaid VAT which will need to be recovered from the national budget. These recoveries are likely to require time and additional administrative resources to explain to the SRS how the overpayment arose and provide documentary evidence on the amount of it.
In summary, we would like to note that the Amendments have not yet been adopted, just presented to the Parliament. As a result, the exact wording and the final date of entry into force may change.
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