Why can tax debtors win state procurements in Latvia?

Officially, in Latvia there are currently no companies with tax debts under public contracts. In practice, however, cases can be found where the tax debt to the firm has disappeared just when it is checked by the procurement commission and then reappeared, reported Latvian Television's De Facto broadcast on January 7.

The Ministry of Finance (FM) hopes to correct this with changes to the law so that the new taxpayer rating will also play a role in the evaluation of procurement commissions.

Half a million euros in tax debts after winning procurements

Daugavpils construction firm Lagron has had a good financial performance so far, however, the firm has often owed hundreds of thousands of euros to the state over the past year. This has not prevented the company from winning public contracts regularly, even though the law requires companies that have not paid taxes to be excluded from the bidders' circle.

There proves to be a loophole in the legislation because the debt has to be paid or postponed with the approval of the State Revenue Service (VID) only on two specific dates - when the submission of applications ends and when the commission decides on the winner.

The Lursoft database shows that Lagron began to delay payment of taxes in February 2023, a couple of days after the company acquired the right to contracts for under one million euros in the procurement of construction works of the Latvian central bank. On March 10, the company entered into a million-and-a-half euro contract with Riga Water, even though the debt to Lagron was more than 100 thousand euros. The purchase had been won at a moment when there was still no debt.

Debt disappeared for a week in mid-March as the company negotiated a pay deadline move with the VID. So, formally, it was no longer a debtor. At this point, Lagron had applied for a million-worth construction contract at Daugavpils hospital.

The company then owed money to the state again, but on May 15, when Daugavpils Hospital Procurement Commission selected the winner, Lagron again had no debts and won a contract with the hospital of €1.1 million.

In the summer months, the company again won a few owhile debt-free Emergency Medical Service park construction procurement, as well as a small purchase of Daugavpils municipal administration.

However, in August, with several million euros guaranteed in public procurement this year, the company delayed the payment of taxes again, and in December the debt was already almost half a million euros.

The VID has also applied a security measure – a prohibition on registering commercial pledges. According to the company itself, the tax debt will not pose problems and it will be able to perform the contracted works.

'Tax debts are quite common for other large construction organizations, given the volume and specificity of contracts in this sector. However, that doesn't mean companies are avoiding tax compliance or breaking the law. It is important to be aware that such debts do not prevent companies from fulfilling their obligations and operating successfully on the market. […] Currently, we are actively working on the performance of tasks in accordance with the concluded agreements,” Lagron said in a written reply.

A tax debt of 140 thousand euros has also formed for Lagron's largest owner, SIA “REM PRO”, which has also regularly won public procurements. One of the largest is the agreement worth more than two million euros with the Latvian Centre for Environment, Geology and Meteorology on the research of the Salaspils nuclear reactor and the development of a building design for the disposal of the reactor.

Jobs at the REM PRO are being hampered, pointing out that the attached subcontractor from Ukraine cannot help because of the Russian invasion.

Tax debt – risk to customers

The Procurement Monitoring Bureau says there are few cases where taxes are paid for specific purchases at crucial moments and then delayed again. However, the head of the office, Artis Lapiņš, points out that customers should see this as a significant risk.

“At a point when work is still underway, the works may not even have been done yet, but such news is being received that the debt is already relatively large, it is very carefully necessary to consider whether to continue such a contract at all, because if it comes down to any restrictions imposed by the VID, banks or simply bankrupt of the company, of course the consequences will be much greater at a further stage,” said Lapiņš.

Riga City Council was in this situation. One of the two winners of a €15 million procurement for the construction of a transmission on Tvaika Street was the Ceļu Pārvalde company, which had already developed a tax debt by the time the contract was concluded in October 2022.

Now Riga City Council says in a written reply that the contract with the indebted “Ceļu Pārvalde” was terminated four months later, in February 2023 due to the lack of funding for the project. In August, when the problems of the Ceļu Pārvalde continued to grow, Riga also terminated the contract for the construction of the street in Lucavsala, which the company did not cope with. Now insolvency proceedings have been opened for Ceļu Pārvalde and the debt to the state exceeds one and a half million euros.

Changes to legislation planned

The Latvian Chamber of Commerce and Industry (LTRK) criticizes the current procedure according to which the tax debt in procurements has to be paid only on two dates. In its opinion, systematic tax avoiders have an advantage.

The Finance Ministry also acknowledges the problems. It is preparing changes to the law so that the criterion for paying taxes no longer depends solely on debt on two dates. Instead, it is planned to use the new VID tax rating issued to all Latvian companies. Bidders with a higher rating will then benefit. The criteria include both tax discipline and whether declared wages are suspiciously lower than the industry average.

FM spokeswoman Olga Bogdanova says said to the law could come into force this year, however, only for small procurements, which in case of construction works are up to 170 thousand, and in case of deliveries – 42 thousand euros. The problem is that the tax rating will be granted only to Latvian companies, while foreigners can start large purchases, which cannot be verified equally by the VID, and therefore the high-rating advantage would also be lost.

It is not excluded that the rating could be applied to all purchases at a later stage.

“Will we succeed in developing this idea more broadly as well - such a desire we hypothetically have, but there needs to be a lot of caution there so that its accusations don't come that we discriminate against any foreigner,” Bogdanova said, while stressing that the tax rating system is new and FM is yet to understand how it will work in life.

Meanwhile, existing requirements for procuring bidders to pay tax debts on two specific dates will remain. But in small purchases, if FM proposals are supported, companies with higher-rating purchasing commissions won't need to be tested at all.

Currently, 18% of Latvian companies have obtained the highest rating “A” in the VID tax rating and the potential to receive additional points in competition in public procurement. The largest category, with 43%, has been rated “B”, which means that these companies need to improve their compliance.

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