Bolt, formerly known as Taxify, entered Latvia in 2016. Problems with the State Revenue Service began at the outset. Cooperation with tax collectors is now better, yet there is still a dispute over corporate tax.
The “Bolt” application is registered in Latvia under the name of the Estonian company “Bolt Operations”. Since 2016, the company has its permanent establishment in Latvia, which is not a company, but would still have to pay corporate tax for its activities in Latvia. According to the VID, Bolt breached this rule. The website of the service shows that, after performing the audit, the agency was charged still under the name “Taxify” EUR 922 thousand in corporate income tax, and under half a million in arrears and fines.
“An economic activity in Latvia has been carried out, the agency is, therefore, a representation of another state company, and no tax has been paid on the activities carried out here,” said the director of the VID Tax Promotion Board Santa Garanča. “This is the period during which this new corporate tax solution with reinvested profits had not yet entered into force. It's 2018, when the old rule on corporate income tax worked.”
Latvian Television (LTV) reports that Bolt has been fined for similar infringements for approximately EUR 200 thousand previously, for which legal proceedings will continue. The company has also appealed the new decision.
““Bolt” complies with laws, practices, and international guidelines in all jurisdictions where the company operates: “Bolt” is transparent to all official authorities. All taxes claimed by the State Revenue Service have been paid by Bolt. There are differences in views on the question of how exactly the corporate income tax should be calculated, taking into account the tax agreement between Estonia and Latvia,” Bolt replied in writing. “The appeal has been filed in court for clarification on the applicable methodology.”
The case also reveals how different business nuances can result in millions of euros in paid or unpaid taxes for foreign companies. For example, the firm “Yandex”, which was recently a competitor to Bolt, left Latvia without paying a cent in corporate income tax, but it does not face penalties by VID.
According to the lawyer Jānis Taukačs, if a foreign company wants to make money in Latvia but does not want to pay corporate income tax here, the main thing is not to open a representation, for example, an office.
“The traditional criterion is that there is at least one person on the spot in the country concerned who is selling. “Not marketing, not providing some information, but selling directly,” said Taukačs. He also added that, for example, booking.com or airbnb.com also don't have permanent representations in all countries that use company apps.
Digital services have led to a worldwide review of corporate tax principles, and it is currently quite certain that there will be major changes in this area in the coming years. The OECD, the European Union, and other countries in the world agreed to introduce a common tax that would force digital platforms to pay tax in each country in which they earn, whether there is a physical representation or not.
The Ministry of Finance said that Latvia's benefits would be measured at several million euros, but probably not at ten million. One of the reasons is that the tax will only apply to the largest companies with a total turnover of over €20 billion. The Ministry of Finance's representative Ilmārs Šņucins said:
“Many countries, including Latvia, are not fully satisfied with this solution. Our market is small enough. There are plenty of players here that are big in our understanding but don't reach this 20 billion turnover of global companies,” Šņucins said. “But the aim is to reduce this threshold gradually and possibly to simplify these rules after the introductory period.”
The second part of the agreement is a minimum corporate tax rate of 15% for companies with a turnover of over €750 million. Latvia differs from other countries in this respect, with the fact that the corporate tax should be paid here only when dividends are removed.
The new arrangement would mean that if the Latvian subsidiary company of a large company does not pay dividends for a long time, the tax on profits would have to be paid by the parent company in its country.
According to Finance Ministry spokesman Šņucins, this does not mean that Latvia should abandon the principle of reinvested earnings, but tax expert Taukačs recommends changing the domestic law so that companies profiting in Latvia do not pay tax elsewhere.