Topicalities about CIT
Topicalities about CIT
What's hot in Q1 2022
On April 7, the President of Latvia announced amendments to the Corporate Income Tax Law (CIT Law). The project envisages various significant changes; please refer to a more detailed comment on each of them below.
Portfolio accruals or provisions for receivables in accordance with IFRS no. 9
The CIT Law will outline for the procedure as to when and how CIT must be paid for the expenses of provisions for doubtful debts by those taxpayers who make provisions in accordance with International Financial Reporting Standard (IFRS) No. 9. If certain criteria are met, then the provision created for a debtor in accordance with IFRS no. 9 is subject to CIT only if the debt has not been recovered within 60 months from when the debt arose, and not within 36 months, as provided by the general norms.
In order to apply the stated norm, the criteria specified in the CIT Law are:
- traceability of the debtor's debt;
- the need for a sworn auditor 's opinion on the financial statements, and
- a requirement for the taxpayer to establish a policy for recognizing, recovering and writing off a provided receivable.
Although, the proposed amendments are very welcome, as they will provide an explanation for the application of the CIT to portfolio accruals, they are quite complicated and may raise questions, so it is hoped that after the amendments (methodological material) from the SRS will issue explaining the practical application of these new rules. For example, 60 months are counted from the time the debtor arises and not from the time the provision was created, so the question arose as to how this provision would apply if the provision was made in the 59th month after the debt arose.
If adopted, these amendments will apply to provisions made from 1 January 2018. This regulation will contradict Paragraph 28 of the Transitional Provisions, which stipulates that Article 9 of the CIT Law on taxation of doubtful debts apply only to those debts created after 1 January 2018 . According to the new provisions, Article 9 of the CIT Law could be applied, for example, to a debt which incurred in December 2017, but the provision was made in 2018. We hope that this contradiction will be eliminated and its application will be explained by the methodological materials of the SRS.
Article 10, Paragraph three of the CIT Law stipulates that in a situation where interest expenses exceed EUR 3 million, interest expenses exceeding 30% of EBITDA will be taxable.
This criterion will be clarified - it will apply not to interest payments, but to the difference between interest income and payments or net interest expenses. Thus, these amendments will ensure that the norm complies with the EU Council Directive 2016/1164 of 12 July 2016 and the situation that this norm is more unfavourable in Latvia than elsewhere in Europe will be eliminated.
The amendments to the CIT law will also stipulate that those interest expenses calculated in accordance with IFRS no. 16 “Lease”, will not be restricted by Article 10 of the CIT Law. In order to be able to deduct this interest in full that the lease transaction must comply with the Cabinet of Ministers Regulation no. 775 “Regulations for the Application of the Law on Annual Accounts and Consolidated Annual Accounts” for operating leases defined in Chapter 11.
These amendments to interest expense will be effective from 01.01.2021.
The transitional provisions extend the debt provision limit from the 36-month period specified in Article 9, Paragraph one, Clause 1 of the CIT Law to 60 months for provisions made until 31 December 2021, due to the impact on taxpayers of the economic instability caused by the restrictions imposed by COVID-19.
Other amendments affecting the application of CIT
The debt to equity limit of 4 : 1 will not be applied in 2021 and 2022.
The article provides an insight into what KPMG Baltics SIA considers to be key changes in tax legislation in the 1st quarter of 2022. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.
Ivonna Balode, Manager, Tax, KPMG in Latvia
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