Simplified Risk Scoring for SMEs and basic IT applications

1. Simplified Risk Scoring for SMEs and basic IT applications May 4 – 6, 2011 Tbilisi, Georgia

2. Segmentation for tax control purposes (1) • For tax control purposes all taxpayers are divided in three groups: • Large enterprises – turnover in previous taxation year is over LVL 3 million • Medium enterprises – turnover in previous taxation year is between LVL 100 thousand and LVL 3 million • Small enterprises – turnover in previous taxation year is under LVL 100 thousand • Segmentation of taxpayers is important for setting up an appropriate type of tax control that is done according to Tax Control Department “Conditions for selection of legal persons for planned tax controls”: • Large enterprises – tax audit or desk audit • Medium enterprises – tax audit, desk audit or thematic check • Small enterprises – thematic check or desk audit

3. Segmentation for tax control purposes (2) • Risk analysis process is computerized and standard risk criteria are used for evaluation of all taxpayers. • All tax controls are set up based on the results of computerized risk analysis. • For each taxpayers’ segment specific risk conditions are defined. • Ranking of taxpayers according to assessed risk points – ashigher risk as higher position.

4. Tax control process Tax control Work with information got during tax control • Tax audit; • Thematic checks; • Observations; • Inspections; • Desk audit Risk Analysis Selection for tax control Setting of control type Collection of information Registration and analysis of the control results Request of criminal process driving force (law enforcement bodies) • Tax assessment

5. Selection for the tax control measures Administrative legal approach Criminal legal approach Tax control measures Risky taxpayers Low risk taxpayers Risk analysis result Cancellation from VAT register, limitation of economic activity Finance Police Board “Fictitious” companies

6. Available information sources • Taxpayers' registration information • Internal information 2.1. Information from tax and informative returns • 2.2. Information about various tax administrating activities • 2.3. Information from different SRS departments 2.4. Information about payments • 2.5. Registry of Fictitious Companies • 2.6. Explanation register • External information – third party information 3.1. Information which is imported in the IT system of tax administration 3.2. Information which is not imported yet but which can be electronically accessed by tax administration via internet

7. External information sources (1) • Registry of Enterprises • Registry of Population • State Land Service (Cadastre) • Land Register • Banks (information on bank accounts registered by legal persons) • State Forest Service • State Company “Latvian Forests” • State Tractor Registry • Vehicle Registry • Shipping Registry • Aircraft Registry

8. External information sources (2) • Information from Markets • Information from State Labor Inspectorate • Information about issued licenses • VAT information from EU countries (VIES) • Information exchange system (direct and indirect taxes) • EUROCANET (European Carousel Network) and EUROFISC • Information on work permits issued by Ministry of Interior • Border Guard Information System • European Business Registry • AMADEUS data base • Emission Trading System

9. Information systems of State Revenue Service of Latvia Information systems used for storage of data: • Tax information system • Central customs information system • Information system for state officials’ declarations Information systems and tools used for risk analysis: • Data Warehouse - information analysis tool • ESKORT – computerized risk analysis system of legal persons • RASA – computerized risk analysis system of natural persons • VIES – VAT Information Exchange System between EU member states

10. IT systems used for risk analysis ESKORT (legal persons) VIES IES Central Customs information system RASA (natural persons) Data Warehouse Reports Information system for state officials declarations SRS users External users Tax information system State Land Service Other information sources State Timber Service Ministries others

11. Examples of parameters for audit selection (1) • Cross-check of the data declared by taxpayer with data declared by other taxpayers and with data from other information sources: • Data on declared VAT turnover are cross-checked with data on deducted VAT input tax declared by other taxpayers – business partners • Data on deducted VAT input tax are cross-checked with data on sales declared by other taxpayers – business partners • Data on transactions made with risky business partners (de-registered from VAT registry on the initiative of tax administration, fictitious companies, buffers, criminal case initiated etc.) • Comparison of the data declared in different tax and informative returns: • Net turnover declared in Profit and loss statement compared to turnover declared in VAT returns • Number of employees is compared with number of structural units of the company and registered cash registers • Data on export from customs compared to export value declared in VAT returns

13. Examples of parameters for audit selection (2) • Comparison of the financial results of economic activity from different periods and economic branches: • Taxpayers operating more than two years with losses • Comparison of the value of cost-benefit ratio for each economic branch (statistical data) with each taxpayer’s ratio • Comparison of the value of average monthly salary for each economic branch (statistical data) with each company’s data on average monthly salary • Comparison of data declared by taxpayer with data provided by third parties: • Data from Markets is used to discover undeclared turnover, use of unregistered labor and “black” salaries • Data from State Labor Inspectorate is used to discover use of unregistered labor

14. Tax audit coverage and effectiveness of SMEs Average effectiveness of tax audits performed in 2010 is 91%, i.e. in 91% of cases audited additional tax assessment has been made.