IMPROVEMENT OF VAT SYSTEM OF LATVIA
Since the beginning of the year 2008, Value Added Tax (hereinafter – VAT) revenues numbers started to drop with continuing downtrend. Urgency of the research is related with the high importance of VAT revenues on the State budget because they comprise more than 50 per cent of the Central government basic budget income. The basic budget is the source of ﬁnancing the state administration, health care, education, defense, including also employment costs; contributions to the international organizations, inter alia, operating payments to the Budget of European Community, ﬁnancing economic development and social projects (for example, the projects of European Regional development fund and European Social fund) and other state expenditures. Therefore VAT collection is crucially vital to the macroeconomic situation in the country. On 09 March 1995 Latvia adopted a VAT type of turnover tax to replace, as of 1 May 1995, the old cumulative turnover tax. The Latvians refer to the VAT as Pievienotās vērtības nodoklis, abbreviated as PVN. The VAT Law (Saeima, 1995) has been amended by the VAT (Amendment) Act 2004, which implemented, as of 1 May 2004, the provisions of the Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonization of turnover taxes within the European Community (the Sixth Directive has been replaced by Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (hereinafter referred to as Directive 2006/112/EC)). VAT is a turnover tax levied at each stage of the production and distribution. Liability to VAT rests with the person supplying the taxable goods or services or importing goods into Latvia. However, the supplier is allowed to deduct from his VAT liability on supplies made, the amount of VAT paid and properly invoiced to him in relation to purchases affected by him, or VAT paid by him at importation (Art. 10, Para. 1, Clause 2 VAT law). The actual burden of the tax is therefore borne by the ﬁnal consumer. The objects of the research are VAT revenues and VAT legislation. The purpose of this research is to develop proposals for improving of VAT laws, regulations and administration that would positively affect VAT levy. The formulated hypothesis that VAT revenues closely relate to retail turnover has been conﬁrmed within the research. Concrete proposals about the necessary amendments in the current VAT legislation are outlined in this research. In order to increase VAT revenues, the limitation of VAT refund are required in the cases when taxable transactions have not been started yet, especially in the ﬁeld of real estate. Amendments in the VAT law are crucially necessary for the rights to deduct VAT in the acquisition of luxury cars which practically are not used for business purposes and taxable transaction. In order to ease administrative burdens for small businesses (annual turnover do not exceed LVL 100,000) which use cash accounting scheme, here idea about VAT cash accounting should be promoted as well. The result would be that small business does not pay VAT until its customer has paid. At the same time VAT can be reclaimed on its purchases when the company has paid its suppliers. This principle would ease VAT accounting and relieve cash ﬂow in small sized companies. In the present situation, all companies use standard VAT accounting and VAT must be paid just after the invoice has been issued.