Worldwide transfer pricing reference guide 2014

Latvia
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
determines that the taxable income of the taxpayer may be adjusted upwards if related party transactions are not at arm’s length.
Transfer pricing documentation requirements are laid down in the Law on Taxes and Duties.
Relevant regulations and rulings
Cabinet Regulations No. 556, promulgated on 4 July 2006, set the transfer pricing methods applicable for determining arm’s
length prices applied in related party transactions. Additionally, specific Cabinet Regulations set requirements regarding the
conclusion of APAs.
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 in most cases accepts the principles stipulated in the OECD Guidelines regarding structure of transfer pricing
documentation.
Priorities/pricing methods
Five methods are accepted: CUP, Resale Price, Cost Plus, Profit Split and TNMM
Transfer pricing penalties
There is no specific 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 adjusted upwards and a penalty of 20% to 30% on the
amount along with a late payment penalty (annual rate of 18%) on the additionally payable corporate income tax may be applied.
Penalty relief
There is no specific penalty relief with respect to transfer pricing adjustments. As per ordinary procedure, penalty imposed in the result
of a tax audit may be reduced by 50%. In addition to this, in practice the existence of proper transfer pricing documentation reduces risk
of transfer pricing adjustments.
Documentation requirements
Taxable persons with annual net turnover exceeding EUR1.43 million are obliged to prepare transfer pricing documentation for all
related party transactions with annual value over EUR14, 300.
According to the Law on Taxes and Duties, transfer pricing documentation should contain the following information:
• General overview of the industry — brief description of taxpayer’s operations in recent years
• Organizational and legal structure of the taxpayer and related entity, including description of internal relations
• Information on taxpayer’s business strategy — market strategy, product distribution strategy and supply chain as well as sales and
management strategy that may potentially affect pricing policy of intercompany transactions
• Description of intangibles that may affect the transfer price (if any)
• Information identifying operations between related companies — functions of the group members, including associated risks and assets
employed, as well as role and responsibility of each group member involved in the transactions and information regarding restructuring
of taxpayer’s operations resulting in transfer (acquisition) of business functions, assets or risks to (from) related party for the price
compliant to the market price
• Description of the goods or services in the transaction between the taxpayer and related party
• Terms and conditions of the agreement concluded between the taxpayer and related party
• Forecast for taxpayer’s operating activities in relation to the agreement concluded with related entity
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