Tax control reform - Innovator.lv

On June 30, 2023, amendments to the law “On Taxes and Fees” entered into force, which significantly change the current tax control procedure and other related issues. Below, we have tried to explain the nature of these amendments and the expected impact on taxpayers in a simplified and abbreviated way.

Tax control

Article 1 of the Law has been supplemented with a new term “tax control“, that is the tax administration inspection, during which the tax administration evaluates and checks the compliance of the information specified (to be specified) in the submitted (to be submitted) tax declarations, information declarations, and customs declarations with the regulatory enactments, the information at the disposal of the tax administration and the actual situation, performs an inspection of individual accounting documents of the taxpayer and the place of the taxpayer’s economic activity, as well as other activities, as a result of which control the compliance with individual tax (fees) or customs regulatory enactments. On the other hand, the terms “thematic examination” and “data compliance examination” have been excluded from Article 1, clarifying the definition of the term “observation”. The term “tax audit (audit)” remains unchanged.

What does it mean? The new type of tax administration inspection – tax control – will include other types of control measures, except tax audit (audit), and it will also be possible to calculate taxes additionally. In this regard, another new term “tax control bill” has been introduced into the law – a decision made as a result of tax control regarding the tax (fee), late fee, or fine to be paid to the budget.

As with data compliance checks so far, the SRS (State Revenue Service) will also initiate tax control by sending a notification[1], informing about the detected inconsistencies or violations and inviting within 30 days from the date of receipt of the notification to eliminate them or submit a justified explanation or additional information. If, in the evaluation of personal data in the area of tax revenue risks, the SRS has found significant inconsistencies in the declaration of wages, the notification on the initiation of tax control will also include the amount of unpaid taxes (Personal income tax and State social insurance contributions) determined based on the calculation in the budget and late fees. The tax control will have to be completed within two months, but the SRS can also extend the deadline up to four months from its start.

Tax control can be completed in four ways:

with a decision on the termination of tax control, if there is no settlement;
by agreeing (see below);
with a tax control invoice, which will include additional taxes and late fees. A fine of 100%, as before, can be applied if the tax control finds that a cash register, system, etc., has been used. with a changed design;
with a decision on conducting a tax audit (audit).

Deadlines for tax calculations and the right to calculate based on calculations

Considerable changes have affected Article 23 of the law, including also regarding invoicing terms. Both the tax audit (part one of the article) and the tax control (part five) can be carried out within three years from the payment deadline set by the regulatory acts, but when checking the compliance of the transfer price with the market price (value) or hybrid discrepancies – within five years from the payment deadline set by the regulatory acts. The mentioned five-year term also applies to tax audits (audits), which simultaneously check the compliance of the transfer price with the market price (value) or hybrid inconsistencies and other taxes that are affected by the performed clarifications of transfer prices or hybrid inconsistencies.

If the compliance of the transfer price with the market price (value) or hybrid discrepancies will be checked, as well as if other taxes are checked at the same time, the 90 days provided for in the third part of the article for issuing a decision on the results of a tax audit (audit) will not be applied.

From now on, not only in tax audits but also in tax control, SRS will be able to make calculations based on calculations[2], if it detects at least one of the signs mentioned in the sixth part of Article 23 – we recommend that you read them again! On the other hand, the provisions of the draft law on the right of the SRS to carry out the so-called calculation of “labor taxes” if the number of wages or hours worked is less than 80% of the average in the country was excluded from the final version of the amendments to the law.

Penalties

With the amendments, the number of fines for gross violations of wage regulations will be changed (Article 32 supplemented with a new Article 5.¹ and 5.² part) – if a person is employed without concluding an employment contract, or after concluding one, but the salary or part of it is not shown in the accounting records or the employer’s report submitted to the SRS, the SRS will further calculate taxes (IIN and VSAOI) and fines in the amount of 100%. Accordingly, the special norms (parts 1.¹ and 1.² of Article 31.²), which provided for fines also amounting to 300%, have been excluded from the law “On personal income tax” with the amendments of June 15, 2023, which entered into force on July 12. Similar amendments are planned in Article 16.¹ of the Law “On State Social Insurance”.

Also, the amount of fines for registered subjects of economic activity (natural or legal persons) for VAT without registration or in case of failure to submit declarations has been changed – the first part of Article 34 of the law and a new part 1.¹ have been clarified (the second part regarding unregistered economic activity has not been changed). Namely, if a legal entity or a natural person has registered as a performer of economic activity:

– within 30 days after the deadline set by the SRS, the tax declarations provided for in the tax laws, as well as the economic activities and accounting documents requested by the tax administration are not submitted, without which the SRS officials cannot determine the amount of the tax to be paid, – the SRS audit will be able to impose a fine of 100%;

– on the other hand, if a person carries out an economic activity without registering as a payer of a specific tax (usually VAT) and within 30 days after receiving a notice from the SRS with an invitation to register as a payer of a specific tax:

1) registers as a payer of the specific tax, then only the tax and late fee will be collected, but there will be no fine;

2) does not register as a specific taxpayer, then the audit will also include a fine of 50% of the unpaid tax amount.

Arrangement Agreement

The entire Article 41 of the law is expressed in completely new wording. It is positive that the agreement can be concluded even before the completion of the audit or tax control. In this case, the additional tax to be paid, the late payment fee and, if applicable, the penalty fee will be determined in the contract.

The amendments provide that the later the contract is concluded at the dispute stage, the smaller the “discount” of late payment and fines is due (for the exact amounts in each situation, see Article 41). For example, if an agreement is concluded in the case of tax control:

until the tax control invoice is issued: 85% of the late fee is canceled;
after the tax control invoice has been issued, but before the expiration of the period for disputing or appealing: 75% of the late fee is canceled;
during legal proceedings: in the first instance, 55% of the late fee is waived, but in each subsequent court instance, the waived amount decreases by 10%.

On the other hand, if the agreement is concluded in the event of an audit:

until the adoption of the SRS decision: 60% of the overdue fine and 60% of the fine have been canceled;
after the decision of the SRS, but before the expiration of the period for contesting or appealing: 50% of the late fine is canceled, but the fine may be reduced by 85% or 50%, or canceled completely, depending on the committed violation;
during legal proceedings: in the first instance, 30% or 65% of the overdue fines and fines are waived, depending on the offense committed, but in each subsequent court instance, the amount to be waived is reduced by 10%.

For natural persons who do not conduct economic activity, the payment term for the payments provided for in the agreement has also been doubled – now it will be two years (nothing changes for other taxpayers – they must be paid within a year, paying a proportional part every month).

!!! Transitional conditions – SRS inspections, which were started until June 29, 2023, are completed according to the “old order” [3] (incl. also agreements of agreement in connection with these inspections are closed according to the “old order”).

Extension of the tax payment deadline

This area has not remained untouched by the “storm of change” either.

Amendments to Article 24 provide that in the cases provided for in the first part of the article, the decision on the extension of the payment term can be granted, refused, as well as canceled with the SRS using an automated decision information system. With such a decision, the payment of overdue tax payments for legal entities will be divided into equal monthly payments, while for natural persons – in equal monthly payments or with a payment once every two months.

Shortened deadline for submitting a request to extend the current tax payment deadline[4] – from January 1, 2024, it will be 5 working days within the current 15 days after the payment deadline. The balance sheet and profit or loss calculation as of the first date of the month of submission will also need to be added to this application.

From now on, it will not be possible to divide into terms up to a year those clarified tax calculations that have arisen after the announcement of the initiation of tax control (currently, this limitation set in clause 11 of the first part of Article 24 applies only to audits).

Other major amendments

The SRS will also be able to provide the requirement at the same time as the initiation of tax control;
Clarification of declarations – if the clarification of the declaration (in a period not checked by SRS) results from the conformity of the transfer price with the market price (value) or a hybrid discrepancy, or it is related to a tax affected by the clarifications of transfer prices or hybrid discrepancies, the declaration can be clarified within five years (in other cases, the current three years remain). The declaration cannot be clarified even if a tax control invoice has been issued for the specific period and tax or an agreement has been concluded, or tax control has been terminated by Article 23. Article 5.² Part 1. point (i.e. without a result), however, in the latter case, you have the right to ask the SRS to allow clarifications to be submitted. After the announcement of the start of the audit, you will no longer have the right to submit the first tax return (currently, the restriction applies only to clarifications of the declarations).
The law clarifies the conditions for debt recovery, requesting overpayments or wrongly paid amounts and paying them off in the event of the death of a natural person.

More information on changes in the tax control process and the conclusion of agreements can be seen at the SRS seminar on July 12, 2023 “What is tax control and how an agreement with the SRS reduces payments“.

If you need an in-depth tax consultation on any of the above-mentioned issues, contact the specialists of SIA “INNOVATOR” using the contact form available on our website or via e-mail at info@innovator.lv.

[1] Exception – the notification is not sent if the administrative violation or the information provided by another competent authority about the detected violation affected the amount of taxes. Then the SRS will issue the tax control invoice within a month after receiving the relevant information.

[2] by the increase in the value of property or capital owned by the taxpayer or information available to the tax administration

[3] procedures prescribed by law, which were in force until the date of entry into force of the amendments (June 30)

[4] divide into terms for a period of up to one year – Section 24, Part One, Clause 1

[5] https://www.db.lv/zinas/nodoklus-kontroles-citadi-512375