On 26 October 2006, the Parliament approved a number of amendments to the law on Taxes and Duties, the most essential of which are liberalization of the tax penalty provisions and changes in the rules concerning cash payments. The amendments will enter into force as of 1 January 2007.
The current provisions, under which the tax payer was subject to a tax penalty of 100% of the unpaid tax, have been replaced with a scale of penalties under which the amount of penalty depends on the materiality of the unpaid tax. Materiality is measured as a percentage of the unpaid tax against the total declared tax liability. When the unpaid tax is less than 15% of the declared tax liability, the tax penalty has been decreased to 30% of the unpaid amount. A penalty equal to 50% of the unpaid tax will be payable if the unpaid tax exceeds 15% of the declared tax liability, while a penalty equal to 100% of the amount of the unpaid tax will be applied if the tax avoidance has been committed repeatedly, i.e. if the tax avoidance has already been detected in a tax audit completed not more than 3 years ago. A more severe penalty has been introduced if the tax avoidance is recurrent, i.e., of a new tax avoidance offence has been committed within 3 years after committing the repeated tax avoidance offence – any subsequent tax avoidance detected within this 3 year period will trigger the tax penalty equal to 150% of the unpaid amount of the tax.
Failure to pay any outstanding default interest, amounts outstanding as unpaid tax liability or tax penalty within 3 months of the due date may now trigger an insolvency filing by the tax authorities.
An important novelty is that no penalties will be charged when the unpaid tax liabilities have been detected and reported to the tax authorities by the tax payer itself. If the tax payer has made such a report prior to the commencement of its tax audit, the tax payer will be liable only for the late interest on the past-due amount of the tax. If the reporting has been done after the commencement of the tax audit but before the audit is completed, the tax payer will be liable for late payment interest plus a penalty in the amount of 10% of the unpaid tax liability. This is a considerable improvement from the earlier regime where even a failure to pay the tax due to negligence would trigger a penalty equal to the full amount of the unpaid tax.
The tax penalty will be decreased to 15% of the unpaid tax liability in the situations when the tax payer concedes to the determination of the tax authorities in respect of his unpaid tax liability, has fully paid the unpaid tax liability as well as any applicable late payment interest and the tax penalty of 15% within 30 days after the completion of the audit, provided that tax payer has not committed any other tax avoidance offences for the last 3 years.
Along with the liberalization of the tax penalty provisions, the amended law has changed the cash transaction reporting rules. The threshold of cash transactions subject to reporting has been raised from LVL 1000 to LVL 3000. In addition, the amendments remove the currently applicable penalties for the failure to report cash transactions and the tax penalty payable if the tax payer had carried out more than three cash transactions subject to reporting during any calendar month.
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