Given that value added tax (VAT) provides about half of the total tax revenue of the State budget in Latvia, but at the same time, the amount of VAT fraud in the country is high, the Latvian State Revenue Service (SRS) has stepped up inspection of the taxpayers’ transactions and counterparties.
As a result of SRS’s inspections, the honest taxpayers also happen to suffer because they are unintentionally involved in their counterparties’ illegal activities. Consequently, it often ends with tax audits and VAT surcharges, sometimes the case comes to proceedings.
SRS acknowledges the opinion established in court case-law that only the taxpayer who did not know or could not have known that the transaction in question was intended by the supplier as a fraud or another transaction within the supply chain before or after the taxpayer's transaction is associated with VAT fraud, cannot be penalized with the restriction of the right to deduct input tax. In practice, this means not only the supplier's VAT number validation, tax invoice receipt presented according to the law and real goods or services received but also other circumstances in the case which make it possible to assess the reliability of the counterparty and transaction risk.
We would like to remind that
in March 2014 SRS published an informative material “SRS’s recommendations for
assessing counterparty risk and transactional risk” that gathers the possible
acquisition of information sources that can be used by the taxpayer when making
risk assessment, as well as provided
possible examples of risk assessment. (SRS link)
Although the SRS’s material has a recommendatory nature, we suggest taxpayers to consider the introduction of this procedure in respect of new suppliers and in cases where there is a large number of suppliers, as it significantly would reduce the VAT taxpayer’s risk in the future.
 SRS’s recommendations for assessing counterparty risk and transactional risk
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