Planned amendments to Value Added Tax Law | KPMG | LV

Planned amendments to Value Added Tax Law

Planned amendments to Value Added Tax Law

KPMG tax news - October 2016

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Senior Manager, Tax Department

KPMG Baltics SIA

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Two draft amendments have been submitted to the Saeima regarding changes in the application of VAT rates, description of terms and concepts, submission of returns, deduction of input tax, and extension of the application of the reverse charge.

Specification of terms in use

It is foreseen to change the terms used in the VAT Law concerning real estate to harmonise them with those in use in the Construction Law. The term used to date, “renovation” will be replaced with “restoration”, “reconstruction” - with “rebuilding”, and verbs such as “to renovate” and “to reconstruct” will be replaced with verbs “to restore” and “to rebuild”.

Application of the 0% rate of VAT

It is foreseen to simplify the application of the 0% rate to supplies of goods and services to the members of the Allied Forces Headquarters and their dependents and the employees of the US embassy. The draft amendments foresee that going forward the 0% rate of VAT will be applied directly to the above transactions. The draft law also instructs the Cabinet of Ministers to develop more detailed regulations on the procedure for applying the 0% rate of VAT.

Application of exemptions

It is intended to delete Point 8 of Section 52(1) which stipulated that services provided by cooperative societies to their members are VAT exempt. By way of justification, the draft law refers to the guidance of the European Commission (“EC”) that “cooperative societies are not economic operators and as such they are not carrying on economic activities and the services they render are not taxable if such services are rendered to their members free of charge. Therefore these cooperative societies are entitled to operate on specific conditions which are out of scope of VAT”. This explanation poses additional questions as it is no longer clear how to apply VAT if services are provided for a fee. It must be pointed out that this interpretation contradicts what was earlier explained in Latvia concerning the activities of apartment cooperative societies. By the amendments to the VAT Law of 30 November 2015 which deleted Point 8 b) of Section 52(1) the Ministry of Finance and the State Revenue Service (“SRS”) explained that going forward services provided by apartment cooperative societies to its members would be taxed. We hope the authorities will provide an explanation concerning VAT application to the activities of all cooperative societies.

Changes were made to Point 23 of Section 52(1) to expand the application of exemption for gambling, raffles and lotteries to electronic or online gambling/raffles/lotteries.

Specification of VAT registration requirements

Changes were made to Section 61 and 63 which stipulates the right of tax payers of another member state of the European Union (“EU”) and third countries not to register with the VAT payer’s register if goods are supplied in a customs warehouse or a free zone, provided an export procedure has been initiated for these goods or the goods are non-EU goods (i.e. goods imported from third countries and not customs cleared in the EU).

It is also provided for in the draft law that a person of another EU member state or a third country is permitted not to register with the VAT payers’ register if it supplies goods or provides services only to the Allied Forces Headquarters in Latvia.

Taxation period

It is important to note that going forward there will no longer be a six month taxation period, instead there will be only one or three month taxation periods.

Newly registered tax payers will be required to submit returns each month at least for a six month period regardless of the value of taxable transactions and the type of transactions carried on. As previously, monthly VAT declarations will need to be submitted in cases when value of taxable transactions exceed EUR 50 000, goods are supplied or purchased within the EU or services are provided where the place of provision is another member state. For those tax payers who do not meet the above criteria the taxation period will be one quarter.

The SRS should be informed on the change of the taxation period using the former procedure: whether by filing a return for the specific period where the period is changed from three months to one month, or by submitting a notification to the SRS by 31 December of the taxation year where the period is changed from one to three months. Tax payers who currently submit declarations once in six months will be required to submit their first declaration in the next year by 20 April concerning the 1st quarter without a specific notification to the SRS.

VAT refund

The possibility to receive a tax refund has been improved by reducing the threshold for the automatic monthly refund of overpaid tax from the former threshold of EUR 11 392.07 to the new threshold of EUR 5 000.

Changes in input tax

The period for deducting input tax in domestic transactions has been extended. The amendments to Section 97(1) stipulate that input tax can be deducted not just in the taxation period when the goods/services and the invoice was received or the advance payment was made but also in the next taxation period. It must be noted, however, that it was often the case that tax payers deducted input tax in later taxation periods and the SRS largely permitted this practice.

The term “representative car” has been broadened to align with the meaning used in the law “On Corporate Income Tax”. Going forward, a representative car will also be a car with a full mass of up to 3 000 kg registered as a lorry (Category N1) with more than three seats (including the driver’s seat) that in fact is a passenger car and the purchase price of it exceeds EUR 50 000 without VAT. It will not be permitted to deduct input tax for the purchase, lease, import and maintenance of such cars.

It will be possible to deduct input tax of 50% on cars that are valued below EUR 50 000 and registered as lorries (Category N1) but in fact are used as passenger cars.

The draft law slightly broadens the regulation on adjustment of input tax due to bad debts. By way of explanation it provides a condition “the debt originated in three years”. This condition is met if the following took place during three years from the date the debt originated:

- a claim was filed to the court requesting collection,

- bankruptcy proceedings were initiated with regard to the recipient of the goods or services

,- insolvency proceedings were initiated with regard to the recipient of the goods or services.

Extension of the reverse charge

In order to reduce VAT fraud in precious metals, from 1 January 2017 it is intended to apply the reverse charge mechanism to transactions with precious metals and supplies of semi-finished products of precious metals, plated metals, precious metal scrap and waste. The recipient of such goods will be required to calculate and declare both the tax payable and input tax.

VAT return

It is intended to reduce the administrative burden in certain VAT return areas. Beginning next year, it will no longer be required to submit the annex to the VAT return “Overview of the value of supplied goods in free ports and special economic zones”. Entities processing agricultural products will no longer be required to report the amounts and values of agricultural products received from each specific farmer during the taxation year by the following 1 February. This information may be provided in the tax declaration for January, February, March or the first quarter for the previous year.

Requirements for import transactions

Persons that are engaged in the import of goods and have not received a permit to apply the special tax regime going forward will be permitted to secure a customs debt only by a bank guarantee. Cash payments will no longer be accepted as a guarantee.

Rounding

The amendments to the law introduce rounded numbers for various amounts set in the law, including:

- the maximum value of a low value gift is set at EUR 15 instead of the previous EUR 14.23;

- the value of taxable transactions to qualify for a VAT group is reduced from EUR 355 700 to EUR 350 000;

- input tax adjustments for an acquired fixed asset will need to be made if the value of that fixed asset exceeds EUR 70 000 (previously EUR 71 143.59);

- the threshold for input tax adjustments due to bad debts is set to be EUR 430 (previously EUR 426.86);

- overpaid tax for the taxation period will be refunded if the amount of overpaid tax exceeds EUR 1 500 instead of the current EUR 1422.87 (where at least 20% of transactions are taxed at the 0% rate);

- input tax on fixed assets will be refunded if the amount of tax exceeds EUR 150 (instead of the current EUR 142.29) etc.

As indicated earlier, these amendments are still in draft form and not accepted by the Saeima, which implies that changes are likely to be made to the wording. We encourage you to follow the progress of these draft laws to be able to prepare for the changes to come in due time.

© 2017 KPMG Baltics SIA, a Latvian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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