The majority of tax controversies are initiated in the course of regular tax audits (field audit) and data verification procedures without collecting additional evidence (ordinary correspondence audit or e-audit). Additionally, tax controversies arise during thematic data inspections with a non-binding request to carry out self-assessment of taxes.
The division of tax controversies by the value and type of taxes is as follows:
Technical accounting errors are mitigated sufficiently effectively with the implementation of an internal tax risk management policy. VAT carousel fraud risk is mitigated with proper know-your-customer (KYC) procedures.
Latvia follows the Organisation for Economic Co-operation and Development's base erosion and profit shifting (BEPs) recommendations, and implements the EU’s measures to combat tax avoidance and aggressive tax planning. Recently Latvia fulfilled the Anti-Tax Avoidance Directive requirements in local tax law. In VAT disputes Latvia follows strict guidelines set by the Court of Justice of the European Union by applying an economic reality test (knew or should-have-known criteria).
In administrative proceedings additionally calculated tax is due at the moment when the tax administration delivers its final decision. An appeal in court does not suspend the obligation to pay additionally assessed tax and a late payment fee to the Treasury.
In criminal proceedings additionally calculated tax is due at the moment when the court's decision becomes final.
The tax administration applies a risk-based tax audit selection method. The risk-scoring process is fully automated. Triggers for an audit may include factors such as:
The tax risk for high net worth individuals is weighed from data automatically collected from banks, from data received from State institutions (land register, register of enterprises, register of vehicles) and foreign tax administrations.
A standard field audit is carried out within 90 days. The time limit can be:
A data verification procedure (correspondence and e-audit) and thematical data inspections are carried out within 30 days.
Taxpayers are free to decide whether a tax audit will take place in their business premises or at the headquarters of the tax administration. Commonly, taxpayers prefer to meet auditors in person in the taxpayer’s premises.
The tax administration generally accepts documents or data made available electronically.
In the majority of field audits the tax administration justifies its decision on the basis of the substance-over-form doctrine. Therefore, special attention should be given to ensure precise and timely communication with auditors to rebut any substantive doubts of disputed transactions. The legal status and form of the evidence bears secondary importance. If contradictory information is encountered, a taxpayer will face a significant challenge associated with the critical assessment of disputed transactions.
Cross-border exchange of information has a significant role in tax audits. This firm's tax litigation team has experienced cross-border audits with the tax authorities of various states.
Tax controversies often involve different opinions between the business and tax administration on the economic substance of transactions. Thus, it is essential to ensure precise and timely communication with auditors.
The taxpayer is entitled to contest the decision of State Revenue Service (SRS) officials on the results of the tax audit in writing within one month from the date of its entry into force to the SRS director general.
When considering the taxpayer's application, the SRS director general may take the following decisions:
If for some reason the SRS decision was not challenged within one month, the taxpayer may ask the SRS to renew the deadline. The request must explain the reasons for the delay and include supporting evidence of the reasons justifying the delay. If the deadline is delayed due to circumstances that a person could independently prevent or mitigate, the request for renewal is unlikely to be satisfied. In this case, the refusal to renew the period of appeal may be appealed to the court.
The disputing of an administrative act is a mandatory process prior to going directly to the court.
The SRS examines the application of the taxpayer and makes a decision within one month. It may be extended by the director general of the SRS for a period of not more than four months from the date of receipt of the challenge application.
The claim about disputing an administrative act can be submitted only in the extent of hierarchy to the director general of the SRS.
The taxpayer is entitled to apply to the Administrative District Court and start tax litigation within one month after the final decision of the SRS director general in the taxpayer's case.
The application should be submitted to the relevant courthouse of the Administrative District Court. In tax litigations the criterion is the address of the applicant.
Along with the application, the taxpayer also submits to the court evidence supporting the application and expresses a request for an oral hearing if the applicant wishes to hear the case at first instance in the oral procedure.
If the applicant has missed the procedural deadline for lodging an application with the court, he or she asks the court to renew the time limit for submitting the application.
First the court checks whether the application complies with the requirements of the law and decides on its progress within seven days.
When deciding on an application, the judge may, if necessary, invite potential participants in the proceedings to question them on the legal and factual circumstances relevant to the decision on the matter.
In preparing a matter for trial, a judge decides if the hearing of the administrative case shall take place in a written procedure or at an oral hearing. The court determines the case in an oral hearing if the participants of the proceedings have requested so or if the court considers that it is more expedient to hear a case at an oral hearing.
If a case is to be settled in a written procedure, the court may, at its own discretion, establish a court session for the performance of a separate procedural act or for the resolution of a procedural matter.
In order to ascertain the true circumstances of the case within the limits of the claim and to obtain a legal and fair trial, the court gives instructions and recommendations to the participants in the administrative procedure, as well as collects evidence on its own initiative (principle of objective investigation).
Once the necessary circumstances have been clarified and all procedural steps are taken, the court delivers the judgment in the case.
The applicant may submit evidence to support his or her application to the Court of First Instance not only at the same time as the action is brought but also at the time of the proceedings if the applicant considers it necessary. The court will only accept evidence that is relevant to the matter.
In an administrative procedure the court itself may use all legal methods and obtain information from participants and other authorities, as well as by means of the assistance of witnesses, experts, inspections, documents or other types of evidence. If the information demanded by a court is not at the disposal of participants in the administrative proceeding but is at the disposal of another authority, the institution shall acquire the information itself rather than requesting it from participants in the administrative proceeding.
In administrative proceedings the SRS shall prove the facts upon which it relies as the grounds for its objections. The SRS may only refer to those grounds that have been stated in an administrative act. An applicant, according to his or her capacity, shall participate in collecting evidence. If the evidence submitted by a participant in an administrative proceeding is not sufficient, the court attempts to collect it on its own initiative.
In criminal proceedings the prosecutor has a duty to prove a person’s guilt regarding a criminal offence with which he or she is charged. This means that the prosecutor will provide the court with sufficient evidence to prove a person’s guilt.
All documents, necessary information and evidence are best debited during the tax audit until the audit decision is made. Should the matter go to court, the arguments and their supporting evidence must be submitted by means of a procedural act (by filing an application or appeal) or, in the case of a court request, within a time limit set by the court.
Conclusion of a settlement should be considered at all stages of the process, as it allows agreement on a reduction of the fine.
Case law (domestic and international courts) is an indispensable source of law that, if established, must necessarily be taken into account when motivating a court decision.
It is recognised that the use of doctrine and international guidelines has also become an integral part of court practice and is also taken into consideration for strengthening the argumentation of court rulings.
Administrative proceedings are heard by the District Administrative Court (first instance), the Regional Administrative Court (second instance) and the Administrative Affairs Division of the Supreme Court Senate (third instance).
In tax litigations, the participants of the administrative proceedings have the right to appeal the judgment of the Court of First Instance, as well as to file a cassation appeal after the judgment of the second instance.
On appeal, the court will review the case on its merits, while judgment of the second instance may be appealed in cassation only if the court has violated substantive or procedural norms or has exceeded the limits of its competence in the case and this violation has led to or could have led to a wrong judgment.
An appellate complaint may be submitted within a month from the day the judgment is pronounced. If the full judgment is drawn up after the time period set, the time period for appeal shall be calculated from the day when the full judgment is drawn up.
The subject-matter or the basis of a claim may not be amended and new claims, which were not submitted in the Court of First Instance, may not be included in an appellate complaint.
An appeal may be refused if the case law on the application and interpretation of these provisions in other similar cases has been established and the judgment under appeal complies with that case.
The Court of Appeal examines the administrative case in a written procedure. The court, subject to a motivated request of a participant in the proceedings, may assess and appoint the hearing of the case in an oral procedure.
In order to ascertain the true circumstances of the case within the limits of the claim and to secure a legal and fair trial, the court provides instructions and recommendations to the participants in the administrative procedure, as well as collects evidence on its own initiative (principle of objective investigation).
Once the necessary circumstances have been clarified and all procedural steps are taken, the court delivers the judgment in the case.
At a Court of First Instance, an administrative matter is adjudicated by a judge sitting alone. If the matter is particularly complicated, the chief judge of the Court of First Instance may stipulate that the matter shall be adjudicated collegially, by a panel of three judges.
Administrative matters in courts of appellate or cassation instance are adjudicated collegially, by a panel of three judges.
The distribution of cases and applications received by the court is carried out electronically using computerised distribution of cases in the Court Information System (CIS).
Conclusion of a settlement agreement between the SRS director general and the taxpayer is a possible ADR mechanism in which the parties conclude a settlement agreement to terminate a legal dispute over additionally assessed payments payable into the budget as a result of the tax audit.
The use of mediation in tax disputes in Latvia has been tried several times as a pilot project, but without the necessary responsiveness; for the time being, the law in Latvia is not suitable for solving tax disputes through mediation.
A settlement agreement between the SRS director general and taxpayer may be concluded at any stage of the proceedings: immediately after the decision of the SRS, which determines the payments to be paid into the State budget, and during the first, appeal and cassation instance proceedings.
By concluding a settlement agreement, it is not possible to reduce or cancel the amount of the basic tax debt. The agreement is only applicable to the reduction or cancellation of the fine and/or late payment. This means that the taxpayer must agree to the amount of the calculated tax payment. In the case of a settlement agreement, taxpayers have the possibility to make the payments stipulated in the concluded settlement agreement in proportion to the year after the day of conclusion of the agreement.
The terms of the settlement agreement depend on the tax violation committed. The fine imposed as a result of a tax audit or compliance check can be reduced by 85%, cancelled in full or 50% and late payment can be cancelled at 50%.
A taxpayer has the right to receive a binding ruling from the SRS regarding his rights in a specific legal situation. A binding ruling is binding to the SRS. If the addressee of a statement has acted in conformity with the binding ruling, the administrative act issued later by the SRS cannot be more unfavourable to the addressee, even if the SRS subsequently determines that the binding ruling was not correct. Receiving of a statement from the SRS is free of costs.
See 6.1-6.4 for relevant information.
If information on tax risk comes from scoring systems then the taxpayer is automatically subject to a tax audit. After the tax audit is completed, an audit decision is sent to the Finance Police to assess grounds for criminal proceedings.
If tax assessment materials are collected by the Finance Police then criminal proceedings are initiated. Criminal case materials have a status of restricted information and only a limited amount of information is shared with tax auditors.
It is accepted by courts that administrative and criminal proceedings may coexist and have little or no impact on each other.
Most of the tax-related administrative processes may evolve into a criminal tax case. In spite of this, such practice is not common.
Criminal proceedings are initiated by the Specialised Prosecutor's Office for Organised Crime and Other Sectors subject to an SRS request regarding the tax debt of an individual.
At first, a public prosecutor initiates criminal prosecution within six months after being informed about a criminal offence and transfers the criminal case to court together with a set of materials and evidence as well as other files. The judge then shall take a decision on the time and place of the criminal proceedings not later than within three working days from receiving the criminal case.
The Court of First Instance directly examines all evidence submitted. The judgment of the court can be exculpatory or convicting.
The procedure of administrative process has been examined in 4 Judicial Litigation: First Instance and 5 Judicial Litigation: Appeals.
Separate houses of courts deal with administrative and criminal proceedings. Both processes may co-exist and have little or no impact on each other. Administrative courts decide on the legality of tax assessment on the basis of administrative principles. Criminal proceedings are resolved by criminal courts and involve a much higher level of burden of proof allocated to the public prosecutor's office.
Late payment fees and penalty fees may be significantly reduced. The amount of tax due stays unaltered.
Before a tax audit is initiated, the SRS gives 30 days for self-assessment of tax status and payment of relevant taxes to the Treasury on voluntary bases. If a tax payment is performed after self-assessment then the penalty fee shall not be applied.
In criminal proceedings, an option of admitting guilt to the raised charges and entering into an agreement with the public prosecutor is available. By concluding an agreement with the public prosecutor it shall not be possible to reduce or cancel the amount of the basic tax debt. In such a case a reimbursement of tax loss is a mandatory requirement.
In the case of a court's judgment of conviction, it is possible to appeal it in a specific part (penalty, arrest, etc) or in whole. An appellate complaint must include information about the amount in which the ruling is being appealed, the way in which the error in the ruling has been expressed, evidence that must be examined in an appellate court and indicate whether and what new evidence is being submitted, regarding which circumstances, and why such evidence was not submitted or examined in a Court of First Instance.
The issues mentioned above in Latvia are mostly dealt with in the administrative process. Criminal processes concerning international tax disputes are very rarely initiated.
Double taxation situations are subject to domestic litigation. A mutual agreement procedure is rarely applied.
General anti-avoidance rules (GAAR) or specific anti-avoidance rules (SAAR) are applicable in cross-border situations by applying the general tax law principle of substance over form. GAAR/SAAR have not been challenged in a domestic court.
Transfer-pricing adjustments are subject to domestic litigation.
An APA procedure has been introduced in Latvia. To conclude an APA there is no special procedure in place. A request to enter the APA together with transfer-pricing documentation must be submitted to the tax administration. The state fee for an APA procedure is EUR7,114.
Transfer pricing situations generate significantly more litigation than permanent establishments and withholding tax.
There are no fees to be paid when contesting the decision of the SRS officials to the SRS director general.
When submitting an application for a case before a court, the applicant shall pay a court fee of EUR30 (first instance).
The appeal and the cross-appeal court fees are set in the amount of EUR60 (second instance).
A security fee for a cassation complaint is set in the amount of EUR70 (third instance).
The participants of the administrative process (taxpayer/tax authorities) are obligated to pay the fees before submitting each procedural document (an application, the appeal and cassation complaint). The obligation to pay fees falls on the party who brings the action to court in each instance.
If the application is satisfied in full or in part, or the proceedings in the case are terminated because of the conclusion of an administrative agreement (repealing the contested administrative act), the court orders the defendant in favour of the applicant the court fee paid by the applicant.
The security fee for cassation is repaid to the applicant if a cassation complaint is satisfied in whole or in part.
In submitting an application disputing an administrative act, compensation may concurrently be claimed. In determining the preconditions for material loss and the amount of compensation, the principles of civil law apply.
If compensation has not been claimed concurrently with the disputing or appealing of an administrative act, a submission regarding compensation may be submitted to the institution that caused the loss or harm.
There are no additional costs if the taxpayer and SRS director general conclude a settlement agreement.
Currently there are 601 pending cases in total where the SRS is one of the parties. In the Administrative District Court there are 386 pending cases, while in the Administrative Regional Court 215 cases are waiting to be tried.
In Administrative District Courts each judge has around ten cases, but in the Administrative District Court approximately nine cases are appointed to each judge.
The values of cases differ, but the average value is not available due to the confidentiality of such information.
Each case is distributed to judges by a computer program and the amount of cases to each judge may differ because of the type of the case or other conditions. Each judge in the Supreme Court Department of Administrative Cases has around 90 cases to try each year but there are no available statistics regarding how many of them are related to tax issues.
In 2018 and 2019 there were 944 cases in total initiated relating to taxes where the Latvian tax authority was one of the parties.
1,017 tax dispute cases were tried in 2018 and early 2019.
Specific data about the types of tax disputes and the values of cases is not available.
In 2015 the proportion of SRS-favourable (including partially) court rulings in all categories of cases – tax disputes, administrative infringement cases, enforcement cases and other disputes – was 90.2%.
In 2016 the proportion was 92.1%. There are no statistics about 2017 and 2018 available, but there is no reason to presume that the average was lower than approximately 90%.
The tax administration in Latvia is employing data analytic tools to identify tax risk and field audit targets to carry out in-depth checks of previously identified high-risk transactions. Thus, the proactive involvement of tax specialists in the early stage of the tax audit process can increase the chances of a positive tax dispute resolution. It is important to ensure clear and timely communication with auditors.
In the early stages of the audit, tax disputes can be resolved through negotiations if proper evidence and explanations are provided.