As per European Court of Justice (ECJ) and local court practice, the most common Value Added Tax (VAT) risk encountered by VAT payers in Latvia is VAT system complexity and counterparty failure in cross-border and domestic supply transactions.

Leinonen Latvia tax advisors held a seminar on VAT related risks referred to tax exemption, particularly in triangulation and supply chain transactions for intra-Community supplies and export on 13 October 2015.

During the seminar various VAT issues were highlighted including documentation enabling a taxpayer to substantiate zero duty application and ways to prevent a vendor from risks caused by counterparty.

The significant input were provided on measures to prevent from complementary tax payment in case of unjustified application of zero duty and rejection of deduction of input VAT paid on purchase if concluded by the State Revenue Service (SRS). According to court practices and SRS, a taxpayer must carry out evident assessment of business partners and fraud risks, i.e. to take steps to avoid the possibility of being involved in fraudulent transactions.  In case of a failure, a taxpayer may be liable to financial loss.

Although taxpayers are aware of all risks, deviations occur at operational level until VAT risk management system is in place. In our view, implementation of such a system depends on internal procedures and capacity within the enterprise, therefore solution in each particular case will be different.