New rules to change VAT tax refunds

RIGA - Because of new VAT guidelines from the State Revenue Service, foreign companies in Latvia have signed a letter of complaint to Latvia's National Tax Board. The new amendments effective Feb. 28 change the applications of VAT on goods supplied across the Baltics or through bonded warehouses. The new guidelines make some costs imposed by VAT nonrefundable.

"We cannot see the point in making it less attractive to do business in Latvia," said Remco Waller, commercial director for logistics company Unilever.

There are four different kinds of VAT in Latvia: taxable VAT known as the standard 18 percent one can claim for refund if it is a business expense; the zero VAT which means one does not have to pay VAT for a particular service, still in reality it is paid and recovered monthly by companies; the exempt VAT which is nonrecoverable the fourth VAT called "outside the scope." It concerns VAT on sales of goods or the purchase of services, such as marketing and advertising, outside of Latvia. The goods might not even touch Latvian soil or go through Latvian customs. This VAT was recoverable up to Feb. 28. However, according to the latest guidelines amended by the SRS, this VAT is no longer to be treated as recoverable.

"It completely upsets the business structure and makes no sense. It's going to pour business out of Latvia," Helen Barker, director of Tax and Legal Services at PriceWaterhouseCoopers in Latvia, said.

Gundars Zakis, Deputy Director of the National Tax Board, said the SRS is always open for any dialogue with taxpayers to get the most optimal result in any of the taxes.

"We can just state that we are amazed. This is the first feedback we have received from a newspaper" Zakis said.

Some of the companies who have signed the letter are Unilever, electronics manufacturer Philips, Siemens and MGH - a multinational transport and warehousing company.

Mark Visman, working for Philips in Latvia, said it would be nice to see the Baltic countries cooperate more on tax issues.

"If you have a bonded cargo in Latvia, the tax guidelines are very unfavorable. VAT will not be recoverable. The strange thing is that Lithuania is moving towards recoverable VAT on export service," Visman said.

Regina Zvirbule, head of the VAT unit on the National Tax Board, said there is no tax imposed on bonded warehouses.

"These are still foreign goods," Zvirbule said.

According to the new guidelines, any VAT paid under the reverse charge rules is no longer treated as recoverable if the costs associated with this VAT were incurred on making sales outside of Latvia, if the goods were never physically present in Latvia, or selling foreign goods inside a bonded warehouse.

These new amendments replace the SRS rules issued in 1995.

"The SRS will interpret the legislation most favorable for themselves," Barker said.

An excerpt from the letter, written and signed by the already mentioned companies, says, "The law does not stipulate different provisions for goods of Latvian origin stored in a customs warehouse and goods of foreign origin stored in a customs warehouse. Thus, the amendments are in conflict with international commitments undertaken by Latvia, i.e. double tax treaty banning discrimination of goods and services of foreign and Latvian origin."

Waller said one would never have this problem within the EU.

"This is a contradiction with EU rules for business within the EU. All the VAT on business expenses for business conducted within EU are refundable," he said.

Since the letter of complaint has not yet been sent to the National Tax Board, they could not comment on it.

"It would be good if there was such a letter, so we could answer it. We had a good meeting with the foreign investors and they voiced no such reactions," Nelija Jezdakova, deputy director of the National Tax Board, said.

However, companies are already talking about moving business elsewhere, should the amendments stay the way they are written today.

"We may change the way we operate. Is Latvia best for us or should we move?" Waller said.

Johann Olafsson, managing director of MGH in Latvia, said people are looking to move their business out of Latvia and that business hates uncertainties - one rule for today, one for tomorrow.

"If you have a structure where you are using Latvia as a point of business, you don't want to lose money on VAT which won't be refunded," he added.

PriceWaterhouseCoopers is currently lobbying hard on the SRS, backed up by a long line of foreign investors in Latvia. They hope the new amendments will be reversed and make the business environment more favorable in Latvia again, they said.

"Involving a newspaper at this stage may not be the best thing," Gundars Zakis, deputy director of the National Tax Board, said.