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Tax alert
c July 2011
Proposed amendments to transfer pricing regulations

an analysis of business and legal factors affecting the taxpayers pricing of goods and services; a review of business environment (competition, sales channels, etc.); a description of intangible assets which could potentially affect pricing of goods and services; functions performed by the parties, risks undertaken and assets used thereof.

On 12 May 2011 the amendments to the Act on Taxes and Fees dealing with transfer pricing (TP) were announced. These amendments are expected taking effect as of 1 January 2012. Specifically, these amendments: 1 Include requirements for TP documentation and define taxpayers who are obliged to have a complete TP documentation for justification of prices applied to transactions with related parties; Define that the tax authority will be entitled to audit transfer prices within five years after the payment term set by the relevant law; Define that taxpayers will be entitled to conclude Advance Pricing Arrangements (APA) (an agreement with the tax authority setting forth price for a particular transaction or type of transaction). 2

The companys organisational and legal structure, including the one of the group, and their mutual relationships. Information about the companys functional strategies having effect on transfer pricing. Information explaining mutual business procedures of related parties (e.g. functions performed by members of a group of related parties, related risks and assets used, the role played by the parties involved and description of responsibilities etc.) Description of the products and/ or services involved in particular transactions with related parties. Descriptions of transactions with related companies and persons related to the company and their contractual conditions. Forecast activities with related parties. Description of the method used for setting the prices. Depending on the method used - an analysis of financial indicators of

TP documentations

Companies whose net sales for a reporting year exceeds LVL 1 million, upon request by the tax authority, will need to justify prices applied to transactions with related parties by providing the following: 1 A general description of the companys industry including: a information about the industry;

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unrelated business persons or comparable transaction prices of unrelated business persons and appropriate transaction prices. 10 Other documents substantiating the pricing of goods and services in transactions with related parties (e.g. sales agreements, sales/ purchase invoices, resolutions by the management board, etc.). If taxpayer fails to submit the TP documentation, tax authority will be entitled freely to amend transfer prices by using information at its disposal.
APA

According to the amendments, if the taxpayer enters into APA with a tax authority, the latter will not be allowed to re-adjust the prices within their tax audits, if the particular taxpayer has followed the provisions of APA.
Further enquiries, please contact:

Edvards Merhels T +371 67 320 200 E edvards@merhels.lv