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New regulation on preparation of transfer pricing documentation

New requirements for transfer pricing documentation.

New requirements for transfer pricing documentation applicable to related party transactions from 2018.


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Revised requirements on TPD

TPD requirements have been revised as part of Action 13 of the Base Erosion and Profit Shifting (BEPS) Project of the Organisation for Economic Co-operation and Development (OECD). Following the changes, there are three levels of documentations to be prepared:

1) Country by country report,

2) Master File,

3) Local File.

In line with the trends of international tax rules and given the need to harmonise the provisions of the law ‘On taxes and duties’ with those of the new Corporate Income Tax Law*, Latvian tax payers will be expected to prepare TPD as required by Action 13 of BEPS. It is important to note that these amendments will apply to transactions carried out in the reporting year beginning 2018.

Who will be required to draft TPD’s?

According to international guidance, TPD should include a country-by-country report, Master File and Local File. As far as the country-by-country report is concerned, we informed about the types of entities that need to prepare it in our publications of 11 July and 14 November 2017. This article discusses the pending requirements in Latvia with regard to the Master File and the Local File.

Latvian residents and permanent establishments that enter into transactions with (1) A related foreign entity, (2) Individual related to the entity, (3) Entities or persons if they are located, setup or established in low tax or tax free countries or territories (offshore companies), will be obliged to prepare and submit TPD to the SRS within 12 months of the end of the relevant reporting year. It is laid down in the amendments that:

— A Master File will need to be prepared when at least one the following conditions is met:

— the total value of controlled transactions in the relevant reporting period exceeds EUR 15 million;

— the tax payer’s annual turnover exceeds EUR 50 million and the value of controlled transactions exceeds EUR 5 million;

— A Local File if the value of controlled transactions in the year exceeds EUR 5 million.

The Local File will need to be prepared within 12 months of the end of the relevant financial year and submitted to the SRS upon request within a month by companies that enter into transactions with the above entities and persons if the amount of controlled transactions in a year is between EUR 250 thousand and EUR 5 million.

Where the tax payer enters into transactions with a related party (resident) and where judging by the functions performed, risks assumed, controlled or managed or assets utilised the commercial or financial relationship in these transactions is connected with a foreign related entity, individuals related to the entity or an offshore entity (take place in the same supply chain), the Local File will need to be prepared concerning such transactions if the amount of controlled transactions in the year exceeds EUR 250 thousand. 

In such cases, it will be possible to submit the Local File within 90 days of an SRS request and when requesting the Local File the SRS will assess whether to request the entire Local File or only certain sections of it. The 90 day submission term can be extended by 30 days, if the tax payer submits a reasoned request to the SRS.

The figure below summarises the types of information to be prepared and submitted to the SRS, including the deadlines for preparation/submission.

*In force from 1 January 2018


The current amendments to the law do not specify the format of TPD if the value of related party transactions does not exceed EUR 250 thousand. It is, however, expected that the format of the TPD will be similar to the one currently used and will be comprised of company, industry, functional and economic analysis.

What should be disclosed in Master File and Local File?

Compared to the existing format, the revised TPD will need to include wider disclosures on the operation of the entire group of companies. TPD should be structured as follows:

 — The Master File contains information on the entire group, including the nature of business activities, overall transfer pricing policy, revenue allocation etc. The information to be included in the Master File may be categorised as follows - group organisational structure, description of lines of business, intangible assets, financial transactions, financial and tax liabilities;

— The Local File includes detailed information on the controlled transactions of the local company. The information included in the document supplements the Master File and is presented to support the assumption that the price in the controlled transaction corresponds to the market price. The Local File contains transfer pricing analysis for these transactions, the underlying financial information, reasoning behind the selected transfer pricing method, a benchmarking analysis etc.

Readers will be able to learn what should be included in the Master File and the Local File in our further articles.

Frequency of revisions, format and language of TPD

In order to provide that the methodology used in TPD and the transaction circumstances are up to date the TPD will need to be updated on an annual basis. However, current amendments also allow updating TPD every three years, if there are no major changes affecting the transfer pricing methodology, i.e. market situation or company’s pricing policy has not substantially changed during the years. It should be noted that the financials of comparable companies or transactions should be updated every year in the latter case.

TPD will need to be available in searchable electronic format. If the Master File is submitted to the SRS in English, the SRS will have the right to request a translation of the document or parts of it into Latvian, and the tax payer will be obliged to provide a translation within a month after the request.


If the tax payer fails to submit TPD in due time or has breached the rules on preparation of the TPD, the SRS will have the right to impose a fine of up to 1% of the value of the controlled transaction, but no more than EUR 100 thousand.

Audit completion deadline

It is provided in the draft law that when transfer prices are evaluated as to whether they comply with the arm’s length principle the regulation on audit deadlines will not apply.

Support from the SRS

It is notable that the draft law proposes to grant the SRS the right to request TPD from the tax payer to check transfer pricing adjustment risk and to consult the tax payer on potential adjustments to transfer prices, to offer to make voluntary corrections in the CIT return or to commence the prior agreement procedure with the SRS. It means that the SRS will not need to begin a tax control measure (audit or thematic review) to request documents from the tax payer.

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