Taxing authority and tax law
Tax authority: The State Revenue Service
Tax law: The arm’s length principle is established in the Law on Corporate Income Tax. Article 12 of the Law on Corporate Income Tax of Latvia determines that the taxable income of the taxpayer may be increased if related-party transactions are not arm’s length.
Relevant regulations and rulings
4 July 2006 Cabinet Regulations No. 556 set the transfer pricing methods applicable for determining arm’s length prices in related-party transactions.
OECD guidelines treatment
Latvian transfer pricing legislative acts contain a reference to the OECD Guidelines on the application of the transfer pricing methods. The State Revenue Service also generally accepts the OECD Guidelines principles regarding transfer pricing documentation structure.
Priorities/pricing methods
Five methods are accepted — Comparable uncontrolled price method, Resale price method, Cost plus method, Profit split method and TNMM.
Transfer pricing penalties
There is no separate penalty for not having transfer pricing documentation. In case the prices applied in transactions between related parties are not at arm’s length, the taxable income of the taxpayer may be increased and a penalty in the amount of 30 to 50% and a late penalty charge (annual rate of 18%) on additionally payable corporate income tax may be applied.
Penalty relief
There is currently no penalty relief available; however, the existence of transfer pricing documentation generally reduces transfer pricing risks.
Documentation requirements
Latvian legislative acts do not provide specific requirements regarding preparation of transfer pricing documentation. However during tax audits taxpayer should be able to justify that prices applied in transactions between related parties are arm’s length. Generally transfer pricing risks are lower if the documentation prepared is based on the OECD Guidelines.
Documentation deadlines
There is no specific deadline for the preparation of the transfer pricing documentation but the relevant documentation could be required during the State Revenue Service tax audit. The tax audit may be started immediately after submitting the Corporate Income Tax Return (i.e., four to seven months after the end of financial year).
Statute of limitations on transfer pricing assessments
Generally the State Revenue Service has rights to make a tax assessment for three years from the payment date of respective tax. This general rule is applicable also to transfer pricing tax assessments
Return disclosures/related-party disclosures
Related-party transactions must be disclosed in Appendix 2 of the Corporate Income Tax Return. The taxpayer should disclose related parties involved in related-party transactions, type of transaction (e.g., purchase or sale of goods, services or fixed assets), volume of transactions and transfer pricing methods applied.
Audit risk/transfer pricing scrutiny
Small and medium taxpayers in Latvia run a medium risk that transfer prices will be scrutinized during a tax audit. However, for large taxpayers the risk of transfer pricing scrutiny is high.
APA opportunity
There are no specific APA rules.
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