Commission Report (2002): Latvia

• Progress since the last Regular Report
• Overall assessment
• Conclusions

Chapter 10: Taxation

Progress since the last Regular Report

Since the last Regular Report, Latvia has made progress with aligning its tax legislation with the acquis in the area of VAT.

In the area of indirect taxation, as regards VAT, amendments to the Law on Value Added Tax were adopted in November 2001. These amendments will introduce a reduced VAT rate on the supply of goods and services that were previously exempt in contradiction with EC VAT legislation. The amendments also introduce a VAT refund scheme for foreign taxable persons not established in Latvia. However, these amendments will only enter into force as of January 2003. In the field of excise duties, no further developments as regards the alignment of excise legislation are to be reported.

No progress can be reported on direct taxation and administrative co-operation and mutual assistance.

Since last year`s Regular Report, some further steps have been taken to reform and strengthen Latvia`s tax administration. In December 2001, the State Revenue Service (SRS) approved the Tax Administration Strategy for 2002--2004. The ongoing introduction of the three level organisational structure has resulted in the establishment of 5 regional offices.

Some progress has been made with improving taxpayer compliance. Improvements in the productivity of VAT audits have led to an increase of 19 % in the amounts collected per audit. The information base for tax audits regarding bankruptcy cases has improved and some measures have been taken to improve the arrears enforcement methodology.

In order to improve the quality of services to the public, two new taxpayers` service halls (27 in total) were opened and a number of other activities were carried out to improve information available to taxpayers. The expansion of electronic filing practice has continued and taxpayers may submit declarations and statements electronically to the SRS. A data warehouse analysis system was launched in 2001 in order to improve tax control work.

Since last years` Regular Report, new units and sectors have been established in the Financial Police Department at the central tax administration and new departments have been created at the regional offices in order to increase the capacity of the Latvian State Revenue Service when fighting against financial crimes.

Overall assessment

Regarding indirect taxation and alignment of VAT legislation, further alignment is necessary, in particular with regard to intra-Community trade.

Further alignment is also needed in excise legislation in order to introduce the combined rate of specific duty and ad valorem duty for cigarettes. In addition, the excise duty rates on certain mineral oils -- gas oil, kerosene and heavy fuel oil -- as well as that on beer should be increased in order to reach the EC minimum rates.

Concerning direct taxation, the Latvian legislation needs to align further with that of the acquis. Legislation will have to be reviewed in order to eliminate potentially harmful tax measures, so as to comply with the Code of Conduct for Business Taxation to the same extent as current Member States upon accession. The legislation on Special Economic Zones and Free Ports should also be brought into line with the tax acquis, notably with the imposition of VAT on supplies of goods, and of excise tax on fuel consumed in free zones, as well as with the Code of Conduct for Business Taxation.

Further efforts are needed in order to modernise and strengthen the State Revenue Service. The organisation of the State Revenue Service should be further streamlined and the introduction of a three-level organisational structure should be completed. Appeal procedures should also be strengthened according to the existing plans.

Regarding information technology and interconnectivity, urgent measures need to be taken to complete alignment. The understanding of the technical details of functional specifications of the VAT Information Exchange system (VIES) should be improved. In general, preparations for the establishment of the Central Liaison Office (CLO) and the VIES should be accelerated.

Conclusions

In its 1997 Opinion, the Commission concluded that the acquis concerning direct taxation should present no significant difficulties, and that where indirect taxation was concerned, a considerable effort would be required if Latvia was to comply with the acquis on VAT and excise duties in the medium term. The Commission added that it should be possible for Latvia to start participating in mutual assistance as the tax administration developed its expertise in this respect.

Since the Opinion, and especially over the last two years, Latvia has made significant progress in aligning with the EC acquis on taxation. Latvia has also made progress with developing the necessary administrative capacity to implement the acquis in this area, but the organisational restructuring which is underway represents a major challenge. Latvia`s level of alignment with the taxation acquis has reached a reasonable degree although a number of weaknesses remain to be addressed. Its implementation capacity is partly hampered by the delays in information technology and interconnectivity. This needs to be urgently addressed.

Negotiations on this chapter have been provisionally closed. Latvia has been granted, for an indefinite period of time, the right to apply a VAT registration and exemption threshold of LVL 10 000 (EUR 17 857) for small and medium-sized enterprises; a technical transitional period of one year for the purpose of applying, once a Member State, for a derogation for simplified procedures on VAT on timber transactions; and a transitional period until 31 December 2009 in order to reach the EC minimum excise duty levels on cigarettes. In addition, Latvia has been granted specific arrangements to continue VAT exemption with credit for input tax on international passenger transport and without credit for input tax on services supplied by authors, artists and performers. Latvia is generally meeting the commitments it has made in the context of the accession negotiations.

In order to be ready for membership, Latvia should focus further efforts on completing transposition -- except for areas where transitional arrangements have been agreed -- in the areas of indirect and direct taxation, including intra-Community transactions, and on further pursuing the measures taken to modernise and reinforce the tax administration. Latvia should step up its ongoing legislative work, and urgently speed up its preparations for electronic interconnectivity.

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