According to many experts in Latvia, value added tax or VAT is one of the most complex and difficult to calculate taxes. It is also the tax that is most frequently involved in litigation; different explanatory seminars on the VAT are organised, since the application of the law involves a range of specific details. The VAT law stipulates most of these details.

Standard VAT rate is 21%

In brief – VAT is a consumption tax that is paid by the end user of the goods or services, since the tax is included in the end price of the goods or services. The standard VAT rate in our country is 21%, however, reduced rates of 5 or 12% are applied to certain groups of goods and services.

Who pays VAT?

VAT must be paid by any registered or unregistered taxpayer, who is registered in the register of VAT payers of the State Revenue Service; this tax also applies to registered and unregistered taxpayers of another member state, who are registered in the taxpayer register of another member state (in particular – Latvia) and, eventually, this tax must also be paid by third country representatives, who are involved in economic activity in another country. Cross-border taxation is the most frequent stumbling block in the area of application of this tax.

VAT objects are:

  • delivery of goods for remuneration;
  • provision of services for remuneration;
  • imports of goods;
  • delivery or purchase of goods in the territory of the European Union, movement thereof between member states;
  • purchase of new transport vehicles by an unregistered taxpayer or a person, who is not a taxpayer, in the territory of Europe.

General and reverse procedure

The VAT law determines both the general and reverse VAT payment procedure for transactions that have been entered into between registered taxpayers within the country. The reverse procedure was developed to simplify tax circulation in transactions between European member states and prevent the need to register in another country. This means that the recipient of goods or services declares VAT input tax for the purchase made, as well as the VAT payable to the supplier

VAT gap

When talking about the VAT law and administration of this tax, it must be mentioned that a huge VAT gap still exists in Europe, which is the difference between the applicable and collected amount of VAT. The VAT gap is caused by tax fraud. Extensive discussions are held regarding the changes required for the reduction of losses incurred by national budgets of the member states.