The government has launched a variety of instruments and mechanisms to support business, such as idleness benefits for various categories of workers and tax payment deferrals. A number of instruments that help reduce output tax existed before COVID-19 but they are all too easy to miss with the current amount of information. So we would like to highlight instruments that help improve cash flows during the current emergency.
- 1. Postponing VAT payments
- 2. Using overpaid VAT
- 3. Using and archiving electronic invoices
- 4. Self-billing
- 5. Loss of inventory
- 6. Refund of VAT paid abroad
- 7. Adjusting VAT on bad debts
- 8. A reduced rate, an exemption or a transaction outside the scope of VAT
- 9. VAT grouping
- 10. A special VAT scheme for imports
- 11. The value of imports
- 12. Manufacturer’s ability to reduce VAT on discounts allowed directly to end consumer
- 13. Reassessing any undeducted input tax
- 14. Evaluating chain transactions
- 15. Opportunity to adjust invoicing conditions and periods
- 16. Government sanctions
1. Postponing VAT payments
Section 24 of the Taxes and Duties Act provides for extending a company’s tax payment deadline for up to one year. For companies affected by the crisis whose business revenues in March or April 2020 dropped by at least 30% (or 20% in certain cases) compared to the same month in 2019, the Cabinet of Ministers’ Regulation No. 165 provides for postponing overdue tax payments for up to three years.
2. Using overpaid VAT
Applying your overpaid VAT for payment of your other tax liabilities or receiving a refund into your bank account (any overpay approved during COVID-19 will be refunded by the tax authority within 30 days after the deadline for filing the tax return or after the filing date if filed late).
3. Using and archiving electronic invoices
Adopting procedures for issuing and archiving electronic invoices helps your company to go digital and reduces the cost of sending and archiving invoices.
4. Self-billing
Section 130 of the VAT Act provides that the customer may issue a tax invoice to himself on behalf of the supplier (this helps them optimise their cash flows).
5. Loss of inventory
Section 106 of the VAT Act permits the taxable person not to adjust input tax for proven losses of inventory (the tax authority has yet to comment on whether taxable persons should change their expected loss rates during the crisis or whether in this case inventories are treated as destroyed by force majeure). It might be worth finding out whether your company has lost any other goods/technologies due to this crisis.
6. Refund of VAT paid abroad
Registered taxable persons can claim a refund of VAT paid in other member states as well as Switzerland, Norway, Iceland, Monaco and the UK, subject to meeting certain conditions. VAT refund claims for purchases made in 2019 are due by 30 September 2020.
7. Adjusting VAT on bad debts
Section 105 of the VAT Act provides for adjusting VAT charged on goods or services supplied if the tax charge cannot be collected from the customer, subject to meeting certain conditions.
8. A reduced rate, an exemption or a transaction outside the scope of VAT
Assess whether goods or services supplied are eligible under the VAT Act (the VAT directive) for an exemption or a reduced rate (e.g. a zero-rating for an intermediary in export transactions). Review the VAT treatment of chain transactions for opportunities to optimise the tax treatment at any stage, and evaluate opportunities or shortcomings arising from any deposits or compensation mechanisms that do not attract VAT.
9. VAT grouping
Consider setting up a VAT group because transactions between the members of a VAT group do not attract VAT.
10. A special VAT scheme for imports
Payment of output tax charged on the import of goods appearing on the customs declaration can be postponed until it is reported on the tax return for the relevant tax period (section 85 of the VAT Act).
11. The value of imports
It is crucial to assess whether the customs value of imported goods has been determined correctly (whether an appropriate method is used for determining the customs value or whether a subsequent discount or an adjusted value of goods is deducted from the customs value) and whether the most appropriate customs procedure is applied (relief for import for processing frequently remains unused).
12. Manufacturer’s ability to reduce VAT on discounts allowed directly to end consumer
A manufacturer that has supplied goods through a wholesale/retail network and allowed discounts directly to the end consumer or retailer should assess whether it is possible to reduce the VAT charge because of the discount allowed later.
13. Reassessing any undeducted input tax
Make a careful reassessment of expenses on which input tax is not deducted (there may still be opportunities for deducting input tax on certain expenses or expense categories such as representation expenses and expenses incurred by employees for the company, or the company is not registered for VAT but makes taxable transactions or transactions that would be taxable if made in Latvia, and companies with partial input tax deduction rights should reassess the method used for deducting input tax).
14. Evaluating chain transactions
There could be a situation where the national tax authority has denied input tax deductions or made the company end up paying VAT in two countries – maybe now is the time to review this.
15. Opportunity to adjust invoicing conditions and periods
For example, issue invoices on the early days of the next month, not the last day of the month, agree that services supplied over a long period will be invoiced every six months, and replace advance invoices with deposits.
16. Government sanctions
Assess whether you are paying incorrect penalties, late fees, tax assessments and other sanctions, or perhaps you are not receiving what is due from the tax authority.
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