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Mistakes in VAT application and it consequences

Value added tax – the most risky tax. Information in the website of the State Revenue Service (SRS) on the results of tax audits carried out by the SRS for the first quarter of 2017 show that 193 completed tax audits, or 93% of all tax audits carried out during this period, have been with the surcharges and additional tax payments of totally 44,8 million euro calculated to the budget of which 55% or 24.6 million euro is value added tax (VAT).

According to statistics, it is evident that from 2013 the trend is unchanged, i.e., VAT surcharges rank first place and still comprise more than half of all tax assessments.

Although more detailed analysis of VAT audits is not available for wider audience, from the SRS publications it can be concluded that the most risky areas of VAT calculation are input tax adjustments for doubtful debts and in other cases, including real estate and reduced VAT rate and VAT exemption application.

Such a constant trend suggests that taxpayers often make mistakes in the tax calculation, as well as underestimate the importance of supplier acceptance/assessment procedures.

Risky transactions. There are a number of supplies that may lead to higher VAT obligations than originally planned by the VAT payers. The reason for this is trivial because the taxpayer has not taken into account or has not been aware of any significant nuisance in applying VAT.

As we know, the export of goods is subject to a 0% VAT rate. Also, the 0% VAT rate applies to supplies to another EU Member State if the recipient of the goods is a VAT payer and the supplier has a transport document confirming that the goods have left Latvia. However, in practice, transactions often do not correspond to standard situations, and one of the payer's main obstacle is the inaccurate or inappropriate processing of transport documents for the transaction.

Our experience shows that taxpayers should pay particular attention to non-standard transactions, since the risk of mistake is greater, i.e., the merchant may be required to register as a VAT payer in another Member State or instead of applying 0% VAT the standard rate of VAT should have been applied. Followingly few transactions to focus on:

  • goods are transported to another EU Member State for storage until the goods are sold to a customer in the same or another EU Member State;
  • goods are sold to a taxable person of another EU Member State but according to instructions of the buyer, goods are transported to another taxable person in the same EU Member State;
  • the goods are transported for recycling or repair to another EU Member State and then sold in that country;
  • company’s equipment or other fixed assets are temporarily transferred to another EU Member State for the purpose of business in that Member State (for example, the plant is rented or used to provide a construction service in another EU Member State);
  • goods produced for export are sold to an intermediary in Latvia before being exported from the territory of the European Union.

A similar list of risky transactions could also be made for the application of VAT to services.

VAT review. In order to avoid VAT surcharges and possible penalties, we recommend that companies from time to time check the VAT calculations. It should not be excluded that such an audit may find that the company has calculated the VAT too cautious and it is possible to save.

It should be noted that for this purpose, it is not necessary to carry out extensive and time-consuming inspections. Our experienced tax consultants can make a separate transaction or group of transactions check within a few hours, draw conclusions and make recommendations. We call this a diagnosis of VAT risks. If you are interested in such a service, please feel free to contact us.

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