International Tax Planning and Transfer Pricing Planning: Latvia from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
EXTRACTO GRATUITO

Professor Dr Rainer Zielke[1]

Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The low tax country Latvia in the OECD context
    • 2.3 Transfer pricing rules of Latvia
      • 2.3.1 Laws and rules
      • 2.3.2 Arm's length principle
      • 2.3.3 Transfer pricing methods
      • 2.3.4 Definition of related companies
      • 2.3.5 Reporting requirements
      • 2.3.6 Documentation requirements
      • 2.3.7 Cost sharing
      • 2.3.8 Interaction between customs valuation and transfer pricing
      • 2.3.9 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Latvia and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Latvia-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Latvia in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Latvia to the US
      • 2.4.8 Case study 2: Interests from Latvia to the US
      • 2.4.9 Case study 3: Royalties from Latvia to the US
      • 2.4.10 Case study 4: Management and technical service fees from Latvia to the US
      • 2.4.11 Case study 5: Capital gains with Latvia as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Latvia
      • 2.4.13 Case study 7: Interests from the US to Latvia
      • 2.4.14 Case study 8: Royalties from the US to Latvia
      • 2.4.15 Case study 9: Management and technical service fees from the US to Latvia
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Latvia as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Latvia confirms in 2016 with a gross domestic product (GDP) of US$ 27,945 million the twenty-sixth-highest GDP of the European Union. In Latvia, has a corporate income tax rate of 15.00%. Thus, Latvia is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Latvia has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Latvia, economic growth is projected to pick up strongly as the disbursement of new EU funds increases investment and the recovery in Russia increases exports. Household consumption will remain robust, supported by continued wage growth, although unemployment will remain high. Wage growth is set to exceed productivity growth, which will hold back the improvement of export performance. The fiscal stance is expansionary, which is appropriate in view of ample spare capacity, and reflects higher expenditure on healthcare and government investment. This chapter provides a survey on the actual tax law frame conditions in Latvia and provides practical support in international tax planning and transfer pricing planning between Latvia and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Latvia applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the profit split method (PSM), and the transactional net margin method (TNMM). A company must use the first three methods. Only when those are not sufficient to determine the arm's length price the latter two may be used. A company is regarded as related to another company if it owns at least 20% of the shares or voting rights in the other company. Further, companies under common control are regarded as related.There are reporting requirements and documentation requirements. There are regulations on binding advance pricing agreements. In practice cost sharing is allowed. There is no relationship between transfer pricing and customs valuation.

Introduction

International tax planning and transfer pricing planning between Latvia, which has had, since the year 2000, one of the highest (GDP) growth rates in Europe, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [2] Latvia confirms in 2016 with a gross domestic product (GDP) of US$ 27,945 million the twenty-sixth-highest GDP of the European Union. In Latvia, has a corporate income tax rate of 15.00%. Thus, Latvia is a low tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Latvia has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [3] in Latvia, economic growth is projected to pick up strongly as the disbursement of new EU funds increases investment and the recovery in Russia increases exports. Household consumption will remain robust, supported by continued wage growth, although unemployment will remain high. Wage growth is set to exceed productivity growth, which will hold back the improvement of export performance. The fiscal stance is expansionary, which is appropriate in view of ample spare capacity, and reflects higher expenditure on healthcare and government investment. Strengthening active labor market policies and targeting them on the long-term unemployed would increase employment and make growth more inclusive. Raising the quality of vocational training would boost productivity growth by easing skill shortages. The relatively low debt level and budget deficit indicate room for further fiscal expansion. The planned increase in healthcare spending should improve the access to high-quality healthcare for low-income households, especially in rural areas. Higher infrastructure investment, such as expanding access to European transport networks, would boost growth. The tax system should shift the burden from labor income to immovable property and environmentally harmful activities while strengthening revenue collection.

According to Orbitax, [4] (Daily Tax News Digest of 3 January 2017), the Latvian parliament has approved an increase in the micro-enterprise regime tax rate from 9.00% to 15.00% effective 1 January 2017. Initially it was planned to reduce the rate to 5.00%, while also requiring micro-enterprises to pay social contributions. As approved at 15.00%, micro-enterprises are exempt from social security contributions

According to Orbitax, [5] (Daily Tax News Digest of 19 December 2016), on 10 December 2016, the amendment laws for the 2017 Budget were published in Latvia's Official Gazette. One of the main tax-related measures is an amendment to the Corporate Income Tax Law restricting the use of carried forward losses. With the amendment, a taxpayer may only offset up to 75.00% of its taxable income per year with losses carried forward for previous years. The amendment includes that this restriction only applies for losses incurred in 2008 and subsequent years. These losses may be carried forward indefinitely, while losses incurred prior to 2008 may only be carried forward up to eight years. Click the following link for the law on amendments to the Corporate Income Tax law (Latvian language), [6] which enters into force on 1 January 2017.

The pivotal question is therefore, how groups of affiliated companies with group companies in Latvia and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the low tax country Latvia is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Latvia (see section 3), and constructive hereon 10 case studies in international tax planning between Latvia and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Latvia and the US.

This chapter had been written based on the following sources:

  • Orbitax[7], Orbitax Country Analysis Latvia and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Latvian Corporate Income Tax Act, CITA, [8]
  • the Latvian Tax Reform 2017, [9]
  • the US Internal Revenue Code, [10] and
  • the Double Taxation Convention between Latvia and the USA signed 15 January 1998 and effective from 1 January 2000. [11]
The low tax country Latvia in the OECD context

International tax planning and transfer pricing planning between Latvia and the US based on cross-border case studies is of central importance. In Latvia, corporate income tax is levied at a rate of 15.00%. Thus, Latvia is a low tax country.

Between OECD Member States, also Latvia, the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the statutory corporate income tax rates. [12] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates – further corporate income taxes, especially on the level of subordinated regional administration bodies. Consequential and following the concept of Gerd Rose[13] there can be calculated combined tax rates for any country, that applied to one (uniform) taxable basis, result in the tax burden of the related country. The combined corporate income tax rates of countries with several taxes can then be compared with countries that just apply a single corporate income tax rate. In addition, an average rate for the whole OECD...

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