TALKING TAX: VAT anti-avoidance: the Baltic angle

  • 2006-11-08
  • by Janis Taukacs
A couple of weeks ago I attended a meeting we regularly have with VAT experts from other EU countries and I realised how much the implementation of the 6th VAT Directive varies. The Baltics do not differ, although when compared with other new member states, the Baltics have less developed domestic law and court practices.

This time the meeting was dedicated to VAT anti-avoidance provisions and the new Directive which amends the 6th VAT Directive concerning VAT evasion or avoidance . The deadline for the implementation of the Directive is January, 1 2008, and as of now, not one of the Baltic States has a draft law to implement it.Less developed domestic laws might be the reason for a comparably wide-spread practice of people purchasing required supporting documents on the input side without a transaction in fact taking place, and so called "carousel fraud". As a consequence, court practices throughout the Baltic states are unfavorable to honest tax payers by sometimes putting an unreasonably high burden of proof on them.

One of the important changes in the Directive introduce a reverse charge mechanism (making the person to whom supplies are made the one liable to pay VAT to the treasury) on: construction works, supply of real estate where the supplier has opted for taxation of the supply (the option to tax still has not been introduced in Latvia), used material (scrap, recyclable waste, etc), supply of goods during the execution of a security, cession (assignment), etc.
The Directive also introduces a more detailed definition of "open market value" for adjusting the value of supplies between connected persons. Inter alia, the Directive refers to the transaction value being not less than the cost of goods or full cost of services supplied.

Of the Baltics, Lithuania has the strictest provisions on the valuation issues, which are sometimes unnecessarily burdensome, because VAT avoidance then is possible, if the recipient of a supply or the supplier is not entitled for a full VAT deduction.
The Baltics have questionably "excelled" in combating VAT avoidance. Latvia, for instance, has a requirement for specific numbers to be obtained from the authorities to be used on way bills for deliveries of goods within the country. Lithuania has an extensive list of cases when a VAT payer must submit a letter of guarantee. Estonia has the creative approach of requiring tax authorities to be notified, if the invoice is stored outside the country.

In the context of other EU member states it is important that the Baltic States introduce amendments to anti-avoidance criteria which have been established in other EU countries, such as: whether there is a purpose for the transaction other than VAT advantage; whether the recipient knew that the supplier is not going to pay VAT to the state; more defined "transaction value" between connected persons, etc.

Janis Taukacs is an attorney at law at Sorainen Law Offices in Riga.