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Law adopted with new requirements for transfer pricing documentation regarding transactions made in 2018

New requirements for transfer pricing documentation

New requirements on transfer pricing documentation that were adopted by the Parliament on 25 October 2018 after a third reading and would be applicable to related party transactions carried out in 2018.

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On 25 October 2018 the Parliament approved amendments to the law ‘On taxes and duties’ which introduce in Latvia the OECD format of the transfer pricing documentation. According to international guidance, transfer pricing documentation consists of a Master File and Local File. 

It is important to note that the amendments state that these requirements are applicable to related party transactions carried out beginning with the 2018 reporting year.

Who will be required to draft TPD?

TPD will be mandatory for Latvian companies and permanent establishments in Latvia of foreign companies that enter into transactions with (1) a related foreign entity; (2) natural persons related to the entity; (3) entities or persons if they are located, setup or established in low tax or tax free countries or territories (offshore companies). And such documents will need to be filed to the SRS in 12 months after the end of the relevant reporting year. It is provided that:

— The Master File will need to be prepared when at least one the following conditions is met:

  • the total amount of controlled transactions in the relevant reporting period exceeds EUR 15 million;
  • the tax payer’s annual turnover exceeds EUR 50 million and the amount of controlled transactions exceeds EUR 5 million;

— Only the Local File when the amount of controlled transactions in the year exceeds EUR 5 million. However, the SRS will have the right to request the Master File, which is to be prepared in 12 months after the end of the financial year and filed to the SRS within a month only upon a request by the SRS.

The Local File will need to be prepared in 12 months after the end of the relevant financial year and filed to the SRS upon request within a month by companies that enter into transactions with the above entities and persons if the amount of controlled transactions in the year is between EUR 250 thousand and EUR 5 million. Where the tax payer enters into transactions with a Latvian related party and where the commercial or financial relationship in these transactions is economically connected (take place in the same supply chain) with a foreign related entity, natural persons related to the entity or an offshore entity, the Local File will need to be prepared concerning such transactions if the total amount of controlled transactions in the year exceeds EUR 250 thousand. In such cases, it will be possible to submit the Local File in 90 days after an SRS request and when requesting the Local File the SRS will assess whether to request the entire Local File or only certain sections of it.

You may download a PDF file which summarises the types of information to be prepared and submitted to the SRS, including the deadlines for preparation/submission.

Tax payers have the right not to prepare the Local File for transactions (below EUR 250 thousand), which under tax laws qualify for the simplified transfer pricing procedure and simplified TPD with the content to be specified by the Cabinet of Ministers by 1 December 2018. The simplified TPD will need to be prepared by tax payers in 12 months after the end of the relevant reporting period and filed to the SRS, if requested, within a month after the request has been made.

What should be disclosed in Master File and Local File?

Compared to the existing document format, the new requirements introduce significantly wider disclosures about the activities of the entire group of companies. Documents should be structured as follows:

 — The Master File contains information on the entire group, including the nature of business activities, overall transfer pricing policy, revenue placement etc. The information to be included in the Master File may be categorised as follows - group organisational structure, description of lines of business, intangible assets, financial transactions, financial and tax liabilities;

— The Local File contains detailed information on the transactions controlled by the local company. The information included in the document supplements the Master File and is presented to support the assumption that the price in the controlled transaction corresponds to the market price. The Local File contains transfer pricing analysis for the transactions controlled by the local company, the underlying financial information, reasoning behind the selected transfer pricing method, a benchmarking analysis etc.

Detailed information about the content of the Master File and the Local File will be provided by the Cabinet of Ministers by 1 December 2018.

Frequency of revisions, format and language of TPD

In order to provide that the methodology used in transfer pricing documents and the transaction circumstances are up to date the documents will need to be updated on an annual basis. However, it is permitted by the law to update TPD every three years if no major changes affecting the transfer pricing methodology, i.e. market situation or the company’s pricing policy have taken place, with the exception that the financials of comparable companies or transactions should be updated every year.

TPD will need to be available in searchable electronic format. 

If the Master File is submitted to the SRS in English, the SRS will have the right to request a translation of the document or parts of it into Latvian, and the tax payer will be obliged to provide a translation in a month after such a request. Although the approved amendments contain no reference to the language of the Local File the SRS is likely to request it in Latvian.

Non-material transactions

According to the approved amendments, where the total value of a related party transaction in the relevant reporting year does not exceed EUR 20 thousand, in the preparation of the TPD the tax payer has the right to treat this transaction as non-material and avoid describing it in the TPD.

Sanctions

If the tax payer fails to submit the TPD in due time or has committed a serious breach of the rules on the preparation of the TPD, the SRS will have the right to impose a fine of up to 1% of the value of the controlled transaction, regarding which the tax payer was required to prepare the TPD, but not in excess of EUR 100 thousand.

Audit completion deadline

It is provided in the draft law that whenever transfer prices are checked for compliance with the arm’s length principle such an audit by the SRS is not subject to the regulation on audit deadlines, i.e. the audit may be carried out longer than permitted by the law ‘On taxes and duties’.

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