When receiving questions from clients, it is evident that there is still confusion as to who should prepare transfer pricing documentation and what documentation should be prepared. We have written about this in detail before, but in light of the questions we are receiving, we will try to clear the confusion, step by step.

1.Transactions with foreign related parties

If you are dealing with a foreign-related company, the market value must be respected in all transactions, even small ones, but the first important threshold is EUR 250,000. To determine the value of transactions, remember that all transactions, both sales and acquisitions, have to be added together, i.e. if during the year you bought goods from one foreign affiliate for EUR 150 000 and sold the same goods to another affiliate for EUR 200 000, the total value of the controlled transactions would be EUR 350,000.

1.1. The value of the transactions is between 250,000 and 5,000,000 EUR

According to Article 15.2 of the Taxes and Duties Act, if the value of transactions with foreign affiliates for the year 2022 exceeds EUR 250,000, then local transfer pricing documentation must be prepared and submitted to the SRS upon request.

In practice, the threshold of EUR 250 000 is quite low and the preparation of documentation is sometimes not economically justified as the tax risks may be low. For example, if a taxpayer has purchased goods for EUR 250 000 on behalf of a related company, applied a 5-10% mark-up and sold them to the related company. Here the tax risk is low.

However, the SRS may require you to produce documentation and, in the absence of documentation, impose a penalty of 1% of the amount of the controlled transactions. In the example above, this would be €3500. In addition, of course, the SRS may also assess the market value of the transactions and make adjustments to the CIT documentation.

1.2.The value of the transactions is above EUR 5,000,000

If the total amount of the controlled transactions exceeds EUR 5,000,000, it is mandatory to prepare and submit the local transfer pricing documentation by the end of the following year, without waiting for a call from the SRS.

Above the threshold of EUR 5,000,000, the master file (global documentation) must also be prepared and submitted to the SRS upon request. So, if the total amount of controlled transactions exceeds EUR 5,000,000, the local documentation must be submitted within 12 months, while the master file must be prepared but not submitted until requested by the SRS.

However, if the turnover of the company exceeds EUR 50,000,000 (and the controlled transactions exceed EUR 5,000,000) then the master file must be submitted within 12 months, without request.

1.3.The transactional value exceeds EUR 15,000,000

In this case, neither the local documentation nor the master file needs to be prepared. However, this does not mean that the market value of the transaction does not have to be respected.

In order to substantiate the compliance of transactions between related companies with the market value, according to Cabinet Regulation No 677 “Application of the Corporate Income Tax Act” the following evidence should be presented:

  • an analysis of the transaction functions
  • describe the transfer pricing methodology
  • a comparability analysis.

This means that documentation must be prepared and submitted upon request by the SRS, but the scope of the documentation is narrower and covers the transfer pricing methodology. However, it should be understood that the information referred to in these three points in practice covers at least 50% of the local documentation requirements, I would say at least 60-75%.

In these transactions, it is up to the taxpayer to assess the tax risks of the transaction and whether to take any measures to mitigate those risks. For example, if a fixed asset is sold for EUR 100,000 with the same residual book value, it is probably not economically viable to prepare documentation. In such a case, depending on the circumstances, one can provide some evidence of the price of such an asset or, for example, add a 5-10% markup to the book value and I think no one will object to such a transaction. But, for example, if there is a loan of EUR 100,000 at 0.1%, it might be interesting and simple enough for the tax authorities to calculate, say, 5% of this amount, which would amount to EUR 5 000 and an additional tax payable of EUR 1 250. Therefore, each transaction has to be assessed individually and a decision has to be taken as to how “strong the papers” need to be.

 2. Transactions with unrelated foreign companies located in offshore zones

A very topical issue because transactions with Russian companies are considered related (controlled) foreign transactions. This means that the above rules apply to these transactions.

3. Transactions with domestic affiliates

Transactions with domestic affiliates are not subject to local and master (global) documentation requirements. The only exception could be a chain of transactions that goes outside Latvia, in which case the SRS has to request documentation.

For transactions with domestic affiliates, Cabinet Regulation No 677 applies, so all of what is said in point 1.4 applies, with the exception that the rules apply to both transactions below and above EUR 250 000.

Also in transactions with domestic affiliates, the risks have to be assessed depending on the amount and type of transaction. In practice, loan transactions, management etc. services, lease agreements are usually the riskiest. Less risky are sales of fixed assets or operating services or sales of goods at prices comparable to goods or services sold to non-affiliates.

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