THE MOST DANGEROUS TAX EVASION SCHEMES

As you may already know, intentional tax evasion or income reduction can result in fines or the suspension of a company’s business activities.

However, if the damage caused to the state is significant (currently a mere €21,500), Section 218 of the Criminal Law even provides for imprisonment. If the offense is committed within an organized group, one can forget about a vacation in the Bahamas for up to 10 years.

Intentional tax evasion is usually proven by uncovering fictitious transactions. An entrepreneur will be out of luck if the following direct evidence of fraud is collected against them:

“off-the-books” accounting documents or files;
witness testimony;
audio, video, or telephone conversation recordings

If such direct evidence does not exist and the entrepreneur does not confess, proving anything becomes quite difficult. Nevertheless, we recommend avoiding tax reduction schemes well-known to the Financial Police, such as fictitious transactions aimed at increasing expenses and reducing profits. Accordingly, SRS auditors attempt to prove the fact that transactions did not actually take place by questioning managers, accountants, and other involved parties. Contracts, waybills, and transport documents are requested, and discrepancies are sought.

It may happen that the Financial Police conduct a search of the company to find evidence on computer disks or USB files. Parting with one’s computer and its files for an indefinite period can be fatal for a company. Furthermore, the owner’s name ends up in the news headlines if forms of fictitious suppliers, stamps, and a pile of cash are found on their desk. Publicity is guaranteed!

A recently established company with a nominal board member from the neighboring country of Belarus, for example, is considered a particularly risky partner in the eyes of SRS employees. Especially if this company employs one person but is simultaneously able to operate in at least six different industries.

The path of the goods is then investigated, as well as whether the supplier even had the capacity to deliver such goods. Cash flow is traced.

If you are a car dealer and a polite-looking, Latvian-speaking buyer approaches you offering a great deal to buy your best car, you can be fairly certain that if you agree to process the transaction with a Lithuanian “UAB,” the car will be driving around Riga again with Latvian license plates after three days, while the SRS will question the transaction and issue a VAT assessment.

We also recommend avoiding situations where a company employee is simultaneously a supplier.

And regardless of who signs the documents, the company manager will be the one primarily responsible!

Did you know that tax optimization is not tax evasion? To avoid fines and more serious liability, there are several completely legal tax optimization schemes. Everything must be done in accordance with Latvian and European legislation!

For example, to reduce its labor tax costs a few years ago, Lattelecom dismissed all its technicians and signed contracts with them as self-employed individuals. When the SRS pointed out that while such a practice is legal, it is not truly permissible, Lattelecom agreed with another company that it would provide the services of these same technicians as an outsourced service. Through such a scheme, Lattelecom had quite legally ensured its ability to pay lower labor taxes.

Consult with specialists and sleep soundly!

P.S. Next time, you will find out which documents to bring to an SRS thematic inspection. See you online!