Latvia

1) REFERENCES

Commission Opinion COM(97) 2005 final [Not published in the Official Journal]Commission Report COM(98) 704 final [Not published in the Official Journal]Commission Report COM(1999) 506 final [Not published in the Official Journal]Commission Report COM(2000) 706 final [Not published in the Official Journal]Commission Report COM(2001) 700 final - SEC(2001) 1749 [Not published in the Official Journal]Commission Report COM(2002) 700 final - SEC(2002) 1405 [Not published in the Official Journal]Commission Report COM(2003) 675 final - SEC(2003) 1203 [Not published in the Official Journal]Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

In its July 1997 Opinion, the Commission took the view that transposal of the Community acquis in the direct taxation field should not pose major difficulties for Latvia. As regards indirect taxation, a considerable effort would be required if Latvia were to comply with the Community acquis on VAT and excise duties in the medium term. Latvia's tax authorities should be able to begin taking part in mutual assistance as they developed expertise in this respect.

The November 1998 Report notes that Latvia has continued to align its legislation in this area but that substantial further efforts were still required to improve administrative capacity. Latvia also needed to bring its excise duties on tobacco and alcoholic drinks into line.

In its 1999 Report, the Commission stated that Latvia had made progress in aligning its legislation in this area, but that further efforts would be required as regards excise duties on beer, tobacco and mineral oils. Restructuring and strengthening of the responsible administrative structures also needed to continue.

The November 2000 Report noted some progress by Latvia in the area of taxation in general but considered that reform of administrative capacity needed to be speeded up. With regard to indirect taxation, the report noted progress in the area of VAT in that the exemption allowing institutions financed from the national budget not to register for VAT in the case of taxable transactions had been abolished even though several exemptions remained. In the area of excise duties, the report singled out improvements through the adoption of legislation on excise duties on beer, alcoholic drinks and tobacco.

With regard to direct taxation, the report approved the improvement in tax collection as a result of audits and fiscal controls but regretted that the code of conduct on the management of enterprises had not been applied yet. With regard to administrative capacity, the report found that developments were encouraging since a global fiscal administration modernisation programme was currently being implemented and the structure of the tax services had been reorganised. Since the last report an internal audit division responsible for the entire tax administration and an arbitration body for complaints and disputes had been set up. Computerisation was also progressing and cooperation had improved since all the offices were linked via the national tax administration network.

The November 2001 Report stated that Latvia had made progress in aligning its legislation, particularly in relation to VAT, developing its administrative capacities and collecting tax. In fact, from now on the law would use the same VAT terminology as the EC directives and clarified the concept of the provision of services in certain sectors. Furthermore, the new provisions laid down specific collection procedures for certain goods. Finally, an initial measure aimed at introducing a refund system for foreign legal persons had been adopted. With regard to excise duties, the legislation on petroleum products was amended and the rates for mineral oils had been brought into line with the minimum level laid down by the EC, with the exception of gas oil, kerosene and heavy fuel. However, a great deal remained to be done in relation to excise duties on cigarettes.

In the area of direct taxation, measures had been taken with a view to applying the EC principles but there had been no developments on administrative cooperation and mutual assistance. As far as administrative capacities were concerned, tax collection had improved and the administrative reform of the tax service had continued. The quality of the services offered to taxpayers had improved and a pilot project for the electronic registration of returns had been launched. The internal IT system allowed for the exchange of data on line with other significant registers.

The October 2002 Report noted that Latvia had made progress in aligning its tax legislation with the acquis in the area of VAT. Some progress had been made in improving taxpayer compliance. However, no progress was noted in the areas of direct taxation, administrative cooperation and mutual assistance.

The 2003 Report notes that Latvia is essentially meeting the commitments and requirements arising from the accession negotiations as regards excise duties and indirect taxation and should be in a position to implement the acquis upon accession. However, it has only met part of its commitments on VAT and so must speed up legislative alignment in this area. In terms of administrative capacity, Latvia also needs to accelerate modernisation of its structures. As regards administrative cooperation and mutual assistance, there are still serious concerns about the implementation of the necessary IT systems. Latvia urgently needs to speed up its work in this area.

Latvia has been granted transitional periods during which it is authorised to maintain its reduced rate of VAT for the supply of heating fuel to private households (until 31 December 2004) and to apply simplified procedures for levying of VAT on timber transactions (for one year following accession). Latvia has also been granted derogations allowing it to maintain a VAT registration threshold of EUR 17 857 and the exemption for small and medium-sized businesses, and to grant VAT exemptions on international passenger transport and services supplied by authors, artists and interpreters.

The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The Community acquis in the area of direct taxation mainly concerns some aspects of corporation taxes and capital duty. The four Treaty freedoms have a wider impact on national tax systems. The legal framework for indirect taxation consists primarily of harmonised legislation in the field of value added tax and excise duties. This includes the application of a non-cumulative general tax on consumption (VAT) which is levied at all stages in the production and distribution of goods and services and requires equal tax treatment of all domestic and import transactions. In the field of excise duties, the acquis consists of harmonised tax structures and minimum rates of duty together with common rules on the holding and movement of excisable goods (including the use of tax warehouses).

EVALUATION

Value added tax

Latvia's current VAT system, introduced in 1995, is based on the main principles of Community VAT legislation. However, it is very general and inconsistent in its application. In addition, the Latvian rules on the exemption of certain transactions deviate to a large extent from the approach taken in Community legislation in terms of both scope and substance; legislative amendments are thus planned.

Since July 1997, the Latvian authorities have continued to amend the VAT legislation. The changes, which entered into force in January 1998, include the introduction of a special scheme for second-hand goods, the removal of discriminatory measures against imported goods (newspapers and magazines), the introduction of a refund scheme for foreign tourists and the lifting of some restrictions on the deduction of input VAT. Further alignment is needed, particularly as regards the definition of the scope of exempt transactions. Even though Latvia has continued reform of the tax administration, further improvements in administrative capacity are necessary for the implementation of the Community acquis.

In 1999, the VAT law was amended to provide for application of VAT on supplies of timber, the introduction of a refund scheme for foreign natural persons (as of the beginning of 2000), and the abolition of VAT exemptions for the mass media (as of 2002).

In 2000, the VAT law complied with most Community principles but the remaining differences need to be eradicated (overly long list of exemptions).

In 2001, further efforts are required in relation to the exemptions.

The VAT law was amended in November 2001. These amendments will introduce a reduced VAT rate on the supply of goods and services that were previously exempt in contradiction with EC VAT legislation. The amendments also introduce a VAT refund scheme for foreign taxable persons not established in Latvia. The amended law will enter into force as of January 2003.

At the end of 2003 Latvia needed to align its definition of taxable persons with the acquis as regards public authorities and its definition of the place of taxation, to introduce the special scheme for investment gold and to adjust its special scheme for second-hand goods. It also needed to devote particular attention to transposition of the scheme for intra-Community transactions. It still had to eliminate the remaining discrepancies concerning the nature of transactions eligible for VAT exemptions or reductions, except in the areas for which it had been accorded transitional arrangements. Lastly, it needed to eliminate discrepancies in its rules on gifts of small value, freight services and the right to deduct for investment goods.

Excise duties

Excise duties are charged on a wide range of products including some which are not subject to excise duties in the European Community (mineral oils, alcohol and alcoholic beverages, tobacco products). A specific duty is charged on each category of product. The taxation of certain products, including some types of tobacco, is on an ad valorem basis, however.

In January 1998, a new law on excise duty on mineral oils came into force, which is broadly in line with Community requirements. It sets up a warehousing system for oils and provides for the minimum Community rates to be reached by 2001.

Amendments to the excise legislation on alcoholic beverages and tobacco products entered into force as of January 1999. This new legislation establishes further alignment of the tax basis and the rates of duty.

In 2000, progress was made on excise duties on beer but duties on tobacco and tobacco products and certain fuels still need to be brought into line.

In 2001, although the rates had been adjusted, they were still below the rates provided for by the acquis. Latvia should also look at the structure of the taxation applied to cigarettes and certain protective measures concerning mineral oils.

In the field of excise duties, no further developments as regards the alignment of excise legislation were reported in 2002.

At the end of 2003 Latvia needed to adapt the structure of rates applicable to beer, the scope of exemptions and the rates of excise on mineral oils and tobacco products. It needed to introduce provisions for travellers' exemptions and extend the duty suspension arrangements to intra-Community transactions. It also needed to eliminate some persisting discrepancies with the acquis concerning the definition of alcoholic products, some mineral oils, cigars and cigarillos. As agreed, excise duties are being gradually increased on cigarettes to reach the minimum rate by 31 December 2009.

Direct taxation

Concerning direct taxation, the Latvian legislation needs to align further with that of the acquis. Legislation will have to be reviewed in order to eliminate potentially harmful tax measures, so as to comply with the Code of Conduct for Business Taxation to the same extent as current Member States upon accession. The legislation on special economic zones and free ports should also be brought into line with the tax acquis, notably with the imposition of VAT on supplies of goods, and of excise tax on fuel consumed in free zones, as well as with the Code of Conduct for Business Taxation.

At the end of 2003 Latvia still needed to transpose the Directives on interest and royalties and the taxation of savings income.

Administrative cooperation and mutual assistance

Latvia has continued to conclude bilateral tax conventions with EU Member States.

An agreement between the Baltic States entered into force in June 1999 on cooperation in the organisation of simultaneous audits of direct taxes. This agreement envisages broader possibilities for cooperation between tax administrations with regard to effective control of taxpayers in the three Baltic States. Urgent measures need to be taken to complete alignment in the area of information technology and interconnectivity. To this end, understanding of the technical details of the functional specifications of the VAT Information Exchange system (VIES) should be improved.

In 2003 a central liaison office was set up and staff recruitment was underway. The excise liaison office had not yet been set up. In terms of information technology, Latvia recently acquired an external VAT information exchange system to avoid further falling behind. It urgently needs to speed up its work in this area.

Administrative capacity

In spite of recent encouraging initiatives, Latvia still has serious problems with administrative capacity and it needs to redouble its efforts to combat fraud and corruption. In 2001, the measures taken were going in the right direction. It is important to step up staff numbers and competences and to improve the specialisation and effectiveness of local tax offices. The quality of services to taxpayers must be improved and a right of appeal against the tax authorities introduced.

Further efforts are needed in order to modernise and strengthen the State Revenue Service.

By the end of 2003, the necessary administrative capacity was in place. Latvia nevertheless needs to strengthen its audit and control functions, which are still understaffed.

Last updated: 14.01.2004