The Baltic Course

Expert ways at tapping taxpayer pockets

By Olga Lukashina,
Professor at the Baltic Russian Institute

On March 12 the business newspaper Bizness & Baltija and The Baltic Course held one of their regular Business Meetings series in the Latvian capital Riga. The topic of discussion was titled tongue-in-cheek. The legislation of your income - was it suggested by life itself? April 1, the deadline for filing personal income declarations, was closing in and owners and managers of commercial firms had the need to talk with authors of the respective regulations and lawyers specializing in this field

The idea of an active struggle against illegal revenues by companies and individuals was first conceived seven years ago. That was when a statutory provision in the law on taxes and duties (Chapter 2, Article 23) was passed, granting the State Revenue Service (SRS) the right to not believe declarations handed in by taxpayers. The tax authority was also allowed to produce its own assessment of the taxpayer's income in so-called expert ways. But at the time there was no clear-cut idea about how experts were supposed to take count of such illegal revenues.

Somewhere around 1996 the first definite steps were taken in this respect. The outcome of meetings with tax inspectors is still fresh in the memory of some traders, being the first to be included in the so-called risk group. The first of the observation methods, officially established under government directives in July 1995, were applied thus: an inspector came to the company, sat down by the cash register and made sure all transactions are registered. During the inspection period (lasting about a week) the cash registers worked like never before. Naturally, in many cases the official turnover that week was higher than the yearly average. The week's turnover was then multiplied by 50 or 52 to get the annual turnover, a figure on which the expert assessment was then based. Taxpayers were of course reserved the official right to prove their innocence, but.

To our knowledge, the revenue service slowed down gradually towards the end of the 1990s. But Latvia's desire to look a worthy partner in the eyes of Europe again brought the issue of fighting against legalization of illegal income back to the foreground.

The year 2000 kicked in bringing Latvian taxpayers terrible news. A provision was added to the law on taxes and duties (Article 22), describing how the SRS is to assess the actual income of the population. It went something like as follows:

A man buys a house (an industrial plant, plot of land). When the tax administration learns about this, it checks its data base and sees that the official monthly salary of this person is 100 lats. His spouse is a housewife/does not work. His children study in prestigious universities abroad. The family has a good apartment, a car. To put it mildly, unbalance between income and expenses is evident. The SRS then starts digging to find out what else the given person (now a suspect) owns. It turns out that he not only provides his family with quite a decent living, but he may also be lending money to his own company (as seen from its annual balance sheet). And this is no small change either.

A person is thus included in the so-called risk group and must explain where he got the money from. The exact procedure for explaining the source of income was adopted in early fall 2000. A new form of income declaration was introduced. It's made up of a thick pack of printed forms with tables and questions: who and when lent you money or gave a gift and what was the relevant amount; how much cash, pieces of jewelry and antiquities you keep at home; what income you received from businesses and what were their names, etc. Answers to all these questions must contain a reference to documentary evidence. All these details have to be listed for a period over the last three years.

The company owned by the person in question was placed in the risk group. The tax authority checks on the assumption that the suspect may have got all his money from the company. It's Possible that the company has an illegal turnover. How can this be assessed?

This question was also answered in 2000. Few cared to read the Latvijas Vestnesis official gazette in the hot days of July. The scandalous government regulations (No. 200 dated June 20, 2000) were hardly noticed at all, although they authorized not only the "observation method" described above. These regulations set forth a dozen most unpleasant techniques to assess the income of business or individuals in expert ways.

A brief summary of the most sensitive points under this document follows.

Did you happen to make any deals below market price? If yes, then "the SRS shall assess the amount of tax payments on the basis of actual market price." (Article 5). This market price is established by any of five methods set out in Articles 5.1. to 5.5. For example, by adding to the actual cost-price of the item or the deal "the average profitability margin of the relevant branch, as given by the Statistics office or the SRS."

Do you have documents to prove the origin of all your property, goods and other valuables in your possession, but not listed in any reports? If no, then (under Article 2.11) you also fall in the risk group. And "the difference between actual growth of value in the taxpayer's assets or capital and the income given by the taxpayer in the reports (declarations, statements)" will be added to your income. This quote was made from Article 6 of the regulations.

And the list goes on. Risk group entries are all those, who happened to displace income and expenditure documents (Article 2.8), who fail to submit reports and declarations (Article 2.3), who do not keep their accounts in due manner (Article 2.7) and many, many others.

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