It is commonly accepted that when the dispute is closely related to the request and to the execution of interest of parties, preventative solutions can be considered as a more effective mechanism of resolving dispute than solving a case in court later. For this reason there is a possibility to sign an agreement with the Lithuanian State Tax Inspectorate. There are two types of agreements between the Lithuanian State Tax Inspectorate and the taxpayer: 1) Agreement on the amount of tax; 2) Advance pricing agreement. The obligatory proceedures and conditions of these agreements are going to be described in this essay.
Taxation agreement might be signed when neither State Tax Inspectorate, nor taxpayer have not enough evidence of the amount of tax that taxpayer should pay. This involves all taxes excluding duties. According to the Supreme Administrative Court of Lithuania[1] this is the ground condition of this proceedure, without it, that kind of agreement can not be signed. Whether there are enough evidence depends on various circumstances and subjective evaluation of the parties. In those cases when the State Tax Inspectorate affirms that there are enough evidence of the tax shortage from the taxpayer, the agreement will not be reached. It is the legal right but not a duty of the State Tax Inspectorate to sign an agreement. That kind of regulation does not bring legal clarity to the taxpayer and it is questionable. Though an offer to sign an agreement can be sugested by both taxpayer and State Tax Inspectorate, the agreement must be in written form. The agreement might be signed if the State Tax Inspectorate does an investigation of taxpayers accounting, it audits the accounts of the company or the tax dispute proceedure has been started. After the agreement is signed the taxpayer is not allowed to contest the amount of tax that was calculated. On the other hand, the State Tax Inspectorate can not increase the amount of tax, that taxpayer should pay for that period.
It is obvious that taxation agreements are a good measure to save time of the parties, it also helps to avoid court procedures and other expences.
An advance pricing agreement is an agreement between the taxpayer and the tax authorities regarding transfer pricing principles related to a particular future associated transactions. It involves transfer pricing methods, principles of comparability with non-associated transactions, critical assumptions for applying transfer pricing policy and other questions related to compatibility with the arm’s length principle of a future associated transaction. Advance pricing agreements might be used for various associated transactions including selling goods or intangible property. An agreement will be valid for 5 years, after the end of this period it must be reviewed. It must also be reviewed if the European or Lithuanian courts release decisions that are changing rules related to advance pricing agreement. Lithuania has chosen unilateral form of agreement when the agreement is signed between the taxpayer and the State Tax Inspectorate not involving foreign tax authorities.
There are some requirements for an application for advance pricing agreement. Firstly, application may be submitted only by a Lithuanian taxpayer or its representative. This means that foreign legal persons are not allowed to apply. Secondly, the application for an agreement must contain a description of all factual circumstances related to the contract or transaction and an explanation of Lithuanian taxation rules that should, in taxpayer‘s opinion, apply to the particular future transaction. Thirdly, application for an advance pricing agreement must include information about the parties involved in the future associated transaction, their relations and activities carried out by each of the parties, their business strategy and also information about the object of the transaction and other details. If the taxpayer did not provide all necessary factual information or details in the application or if the information provided by the taxpayer is not correct, the Lithuanian State Tax Inspectorate are not obliged to follow the agreement. Based on this information, the taxpayer in its application, must describe the transfer pricing method, critical assumptions and other information proving compliance with the „arm’s length“ principle. The Tax authorities must adopt advance pricing agreement in 60 calendar days. Unlike the taxpayer, the decision is mandatory for the tax authorities of all levels.
Advance pricing agreements are expected to provide an opportunity to manage tax risks related to their activities in Lithuania more effectively and to improve the attractiveness of the Lithuanian tax system and investment climate for foreign investors.
Dovile Aukstuolyte
Assistant to the Attorney at Law
ECOVIS Miškinis, Kvainauskas ir partneriai advokatų kontora