A problem that would be easy to fix

I spent a few days travelling around the businesses of Latvia's southern neighbour. The most problematic tax issue I heard about Latvia was.. the translation of transfer pricing documentation.

Where is the problem coming from?

The problem stands firmly on 2 legs:

The State Language Law, which stipulates that documents to be submitted to state or local government institutions must be drafted in the state language;

The Taxes and Fees Act, which states that global TP documentation must be prepared in Latvian or English.

If the global documentation is prepared in English, the tax administration has the right to request a translation of all or part of the documentation into Latvian and the taxpayer is obliged to submit the requested translation within one month of receiving the request.

The SRS interprets the above provision as meaning that if the law once provided for a choice for the TP global documentation, there is no such choice for the local file.

There is also an old problem - it makes no sense to require TP documentation for transactions between 2 related companies within Latvia, because it is impossible to shift the tax to another country. The point of TP documentation is to prove there is no artificial shift of CIT from a higher tax country to a lower one. The counter-argument heard is that profits can be shifted to a loss-making company. But in our CIT system, one can simply decide not to distribute profits and thus no CIT is paid anyway. Why to burden the business with a bureaucratic TP documentation requirement? From a business point of view, by the way, it would only be logical to consolidate the financial results of its group within one country. Ok, this does require a change in the law, but what about the language?

TP documentation (local file) in most cases refers to cross-border transactions. It is therefore prepared in English so that it can also be checked in the other country before being submitted to the tax authorities. We live in 2024, where various automatic translation tools work. They are not so brilliant that business will use them for accurate translation, but they are enough for the administration to use them. As a result, at the end of the year, translation agencies work hard translating hundreds of pages.

Because the SRS had a dispute with one of the taxpayers about the translation and in the end decided that the TP documentation should be considered as not submitted. So what? A penalty - up to 1% of the controlled transactions or up to EUR 100 000. The taxpayer concerned would need to take the matter to court, which would certainly decide not in favour of the SRS, but such a move also costs money...

In September 2023, the SRS issued guidelines on the application of fines for breaches of TP documentation. It sets out a gradation of TP documentation infringements into 3 categories: major, mild and minor. The list of major infringements includes: failure to comply with the language requirements for local or simplified TP documentation! Major?!

Option 1 - The SRS may consider the infringement to be a minor one, if it is an infringement at all. Option 2 - The SRS may help businesses and announce that from now on also local TP documentation may be submitted in English. No change in the law is required. The same State Language Law provides that state and local authorities may accept and examine documents received from abroad without translation into the national language. TP (including local) documentation for cross-border transactions is coordinated by Latvian companies with the related foreign ones. Therefore, they can be considered as received from abroad.

..during business negotiations, my Estonian colleague was chuckling in his beard and was mostly silent, because everything is still simple and business-friendly in Estonia. Also, TP local documentation can be submitted in English there. The only thing the clients didn't understand was how do tax consultants in Estonia earn money.