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TALKING TAX: More air to breathe in Latvia's tax enforcement system

  • 2006-12-20
  • By Edgars Koskins [ Sorainen Law Offices ]
A long-awaited day for Latvian taxpayers is coming as amendments to Taxes and Duties Act 1995 go into force. As of Jan. 1, 2007 the penal system for unpaid taxes in Latvia is to see the first substantial revision since its creation in the begging of 1990's.

In fact, news regarding revision of the process of levying penalties for unpaid taxes should not cause so much excitement for the average taxpayer as would some more attractive novelties like a reduction of applicable tax rates. However, those who have experienced a tax audit conducted by Latvian tax authorities, and been penalized, will be aware that something big has indeed happened.

The tax penal system in Latvia still works, and has worked for many years, in a straightforward, harsh way. If tax administrators found that a tax had not been paid on time the alleged violator would be ordered to pay the unpaid tax and a penalty in the amount of the unpaid tax. Simply put, it was a 100 percent penalty.

The penalty system was indifferent to circumstances that caused the unpaid tax. Regardless of whether there was gross negligence or a typo in an invoice, the fine was the same 's 100 percent. In our practise once there was a VAT deduction case where an accountant had missed one digit from a company registration number. As a result, a several thousand lat fine was imposed. It is indeed an absurd and unfair way to deal with taxpayers. Lately, however, some unfair penalties were reduced by the Supreme Court Senate.

In brief, the latest amendments to Taxes and Duties Act 1995 provide improvements to the penal system. For the first tax violation the maximum penalty imposed is 50 percent of unpaid taxes. However, the aforesaid penalty is subject to further reduction, down to 30 percent, if the unpaid tax amounts to 15 percent or less of the total tax payable in the audited period.
Finally, drafters of the amendments indicated that one of the underlying purposes of the changes is reducing the extreme amount of tax disputes raised by disgruntled taxpayers. The Taxes and Duties Act 1995 as of Jan. 1, 2007 offers a "carrot" to a taxpayer: any complaints and disputes with the tax authorities can be dropped by paying the unpaid tax, including late payment interest, and a 15 percent penalty in 30 days from the decision of the tax audit.

This is quite a deal for avoiding two appeals in the tax authorities and probably three more in administrative court, which in total could stretch out four to five years under current rules. How it will work in practice? It is something to see.

Edgars Koskins is an assistant attorney-of-law at Sorainen Law Offices in Riga.