Guidelines on business partners

Lithuania: Tax authority issued guidelines on the reliability of new business partners due to VAT violations.

On 25 February 2014, the State Tax Inspectorate under the Lithuanian Ministry of Finance (STI) issued guidelines on the reliability of new business partners. The STI listed criteria to be taken into account when contracting agreements with new partners. This action is prompted by value added tax (VAT) violations, which form the biggest part of tax violations overall. The purpose of the STI publication is to provide business with recommendations to avoid situations when new transactions contribute to tax frauds.

The STI noted that counterparties in the risk zone are those that conceal information on e.g. their business address, responsible persons, head of company, or bank accounts, or those that ask for payment in cash or through third parties, or that fail to discharge their tax obligations. As a result, transactions with these counterparties can have negative tax consequences. Why? Because when it comes to a tax dispute over VAT deduction or the 0% VAT rate, the tax authority’s argument is based not only on fairness to the taxpayer but also on the fact that the taxpayer has a right or should have the opportunity to know about the other party’s fairness.

It seems that in this way the STI seeks to delegate its control function to business so that businesses will perform a comprehensive analysis on new partners. In our view, these requirements are excessive, even in some cases incompatible with other rules (i.e. personal data protection legislation).

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