The taxable period is one month. If a taxpayer is allowed to book supporting documents quarterly, then the tax period is a quarter.
Under the new CIT model, the items subject to CIT should be reported either monthly or annually, depending on the nature of the items. In general, items subject to CIT should be included in the tax return for the tax period in which costs were incurred. If a tax base arises, a tax return should be filed each month on or before the 20th day of the following tax period. If a tax return is not filed with the SRS, this will mean that no tax liability arose in that month. The tax base can be adjusted for non-business expenses only in the month they were incurred. Accordingly, if an adjustment is still needed, a late fee will be charged.
It is mandatory for taxpayers to file a tax return for the last month of the financial year.
The transition rules govern cases where a taxpayer’s financial year is different from a calendar year. In that case, the taxpayer should prepare interim financial statements and the CIT return.
Payment of tax
If a tax base arises, the tax charge should be paid each month on or before the 23rd day of the following tax period.
Tax audit process
A tax audit begins with an audit note for open tax years (please see Statute of limitations below). An audit may last a few weeks or a few months, but not exceeding 90 days. It can be extended to 150 days if information is requested from a foreign tax authority. If a simultaneous tax audit with a foreign tax authority is initiated, then such extension is not limited.
The SRS should inform the taxpayer of a tax audit no later than ten working days before the start of the audit with notification about documents the SRS would like to see.
During a tax audit, the auditors will notify the taxpayer about any irregularities in the calculation of tax payments and any fines that could be levied. Before issuing the tax audit decision, the auditors will invite the taxpayer to final negotiations to discuss the tax audit results.
Following the tax audit and notification of its findings, the company may take the following steps:
- Negotiate with the SRS to reduce the tax burden and achieve an 'out-of-court settlement'. The out-of-court settlement makes it possible to reduce fines by up to 100% and late charges by up to 85%, but not the additional tax assessment. Entering into such a settlement presupposes that the company accepts the audit findings for the audited years.
- Appeal the decision to the Director General of the SRS.
- After receiving the decision of the Director General, the taxpayer may take the case to court. An advance payment of the additional tax liability and late charges is required. The first decision normally takes up to two years and another two years until a decision by the Court of Appeal and the Supreme Court is issued.
Statute of limitations
The SRS may collect any unpaid taxes within three years after tax payment was due. Transfer prices may be examined for five years.
Topics of focus for tax authorities
The SRS tends to scrutinise:
- Transfer pricing, non-arm’s-length lending, and other arrangements with related parties.
- Non-business, marketing, and representation expenses.
- Payments to and from non-resident companies, including tax haven companies.
- Obligation to register a PE in Latvia.
- Unpaid payroll taxes or hidden employment.
- Recoverability of input VAT.