Tax assessment procedures - Room for improvement?

The media is full of coverage about Latvia’s economic situation and various viewpoints have been expressed as to what needs to be done to tackle the economic crisis. Suggestions include improvement to the business environment, the implementation of more favorable treatment of small and medium sized businesses, and the stimulation of exports. On another view, it is necessary to increase taxes and make tax collection more effective.

Not many of these measures, with the notable exception of tax increases and perhaps a more aggressive approach to tax collection, seem to be taking shape. Clearly the state must collect taxes. But where the quantum of taxes payable is at issue, is care always taken in tax assessment? Take, for example, the case of a Latvian company seconding employees to a Norwegian registered company. Latvia and Norway have long been signatories to a treaty on the Prevention of Double Taxation and Tax Evasion (the “Treaty”).

Article 7 of the protocol to the Treaty states that taxes for seconded employees are payable in the country to which they are seconded. If a Latvian company seconds employees to a Norwegian resident company, then the Norwegian government is to be paid the applicable taxes. The convention sets out the criteria for determination of what constitutes a secondment. On a plain reading of the protocol to the Treaty, a Latvian registered company has understood that taxes for its employees seconded to a Norwegian registered company located in Norway are payable in Norway.

The State Revenue service of Latvia has a conflicting view, maintaining that the taxes are payable in Latvia. It is therefore assessing the Latvian seconding entity as being responsible for payment of taxes in relation to the seconded employees. In this particular case, tax appeals against the State Revenue Service tax assessment have specifically included reference to Article 7 of the protocol to the Treaty. The Latvian entity has therefore set out a demand that the State Revenue Service justify its assessment in light of the existence of Article 7 of the protocol to the Treaty. To date no explanation has ensued.

The distress of the Latvian company is somewhat heightened by the fact that it won at the court of first instance, yet the State Revenue Service is appealing the case, despite the fact that on a plain reading of the language of Article 7 of the protocol to the Treaty, there is no basis upon which to launch an appeal of the decision. As a matter of procedural fairness, the State Revenue Service should be obliged to clearly set out the grounds for its position in cases where tax assessment is in dispute and the taxpayer has put forth a reasonable argument as to why it is being over-assessed.

That way, if the grounds advanced by the State Revenue Service are reasonable, as they often may well be, the taxpayer may feel compelled to stop challenging the State Revenue Service and pay its tax debt. But ignoring the taxpayer’s reasoned arguments and simply kicking the matter up to the next court level is an inefficient use of court resources and a disservice to the taxpayer.

Martins Mezinskis is a litigation lawyer at Kronbergs & Cukste. Kronbergs & Cukste is a founding member of Baltic Legal Solutions, dedicated to quality pan-Baltic legal services. Baltic Legal Solutions includes Jurevicius, Bartkus & Partners in Lithuania and Glikman and Partnerid in Estonia.