In my work practice, I have encountered a number of problematic situations when assessing different companies and individuals carrying out economic activities. Countless cases (administrative cases, thematic inspections and audits) initiated or initiated by officials of the State Revenue Service (hereinafter - SRS), decisions taken by the SRS are overturned by the courts in the appeal process - poor and sloppy work of SRS employees or normal practice? It seems that entrepreneurs who have at least once come into contact with inspections carried out by SRS officials would agree, thus arriving at a different perspective on how to interpret the provisions of the law.
The purpose of this article is not to question the professionalism of the SRS staff, but rather to draw attention to issues that are unfortunately not analysed and not professionally explained to the business community.
This time I will focus on the issue of inspections (thematic inspections or audits) carried out by SRS officials, as a result of which a company is held administratively liable under Article 159 of the Latvian Administrative Offences Code (hereinafter - LAPC) if, during the inspection, it is found that the company has concluded an authorisation agreement for the performance of a specific work. The aforementioned Article of the LAPC stipulates that a fine of from one hundred to two hundred and fifty lats shall be imposed on natural persons, and from five hundred to one thousand and five hundred lats on legal persons, for evasion of payment of taxes or payments equivalent thereto, as well as for concealment (reduction) of income, profit or other objects subject to tax. In simple terms, if the SRS finds out during an inspection that a company employs an employee with whom it has not concluded an employment contract, then the company is automatically held administratively liable + taxes are calculated which the company has to pay to the state budget. Sometimes these amounts are disproportionately high, with the result that small businesses are unable to pay them at all, bankrupting the business and leaving the inhabitants of a small town or municipality without work and the municipality without tax revenue.
Focusing on the employment contract and its preconditions, I would like to provide my legal perspective. If there is a dispute in a case as to whether an entrepreneur - the principal - could, without concluding an employment contract, authorise another person to carry out certain activities on his behalf, such as the management of forest estates and the exploitation of forests, it is necessary to consider all the evidence in the case in its entirety.
Law on State Social Insurance 16.1, paragraph 1, provides that if an employer has employed or is employing a person without a contract of employment, enterprise, grain or transport, and has calculated or paid, or should have calculated and paid to the employee, income on which compulsory contributions should have been calculated, but that income has not been entered in the accounts and in the report on compulsory contributions to the State social insurance on employees„ earnings, personal income tax and business risk levy submitted to the State Revenue Service in the reference month and on which the compulsory contributions have not been calculated, The State Revenue Service shall recover from the employer the compulsory contributions from the amount corresponding to the information in the possession of the State Revenue Service on the remuneration to be calculated for the person, if its amount can be determined and if it is higher than the minimum monthly wage determined by the Cabinet of Ministers, or from the minimum monthly wage determined by the Cabinet of Ministers if the remuneration to be calculated is equal to or lower than it or if the actual remuneration cannot be determined, and a fine in the amount of three times the compulsory contributions. If it is not possible to establish the period during which the employer has employed the person without concluding an employment, enterprise, grain or transport contract, the person shall be deemed to have been employed for three months, including the calendar month in which the infringement was discovered, unless the employer or the employee can prove a shorter duration of the employment relationship.
It follows that this provision does not apply to every worker who, according to Articles 1 and 5 of the Law on State Social Insurance, is a compulsorily socially insurable person, but applies only if the person is employed on the basis of an employment, enterprise, grain or transport contract. Thus, if the SRS has rightly applied Section 16.1(1) of the Law on State Social Insurance in a particular case, the SRS has to prove that the entrepreneur (the principal), as the employer, has directly established an employment relationship with the principal.
In our country, the Labour Law states that an employment relationship is a relationship between an employer and an employee established by a contract of employment in connection with the performance of paid work, where the employee is personally subordinate to the employer during the performance of that work. The Labour Law provides that the employment contract must be concluded in writing, but the employment relationship arises and subsists even if the written form is not complied with when concluding the employment contract. An employment contract is deemed to have been concluded when the employee and the employer have agreed on the work to be performed and the remuneration, as well as on the subsequent submission to the established working arrangements and the employer's orders.
Consequently, in order to establish in a dispute whether a person has been employed on the basis of a contract of employment, it is necessary to obtain direct or circumstantial evidence that the essential elements of an employment contract, including the performance of work for remuneration, were agreed between the alleged employer and the person employed, and that the work was performed directly within the framework of an employment relationship. Remuneration is one of the essential elements of an employment contract which must be agreed between the parties in order for an employment relationship to be established. However, it is not necessary to establish that remuneration has necessarily been paid (received) in order to find that an agency relationship has been established. It is necessary to establish that the parties, when concluding the contract, agreed on remuneration, i.e. on the establishment of a relationship of consideration for the performance of the work. This is clear both from the regulation of the contract of employment and from Article 16.1 of the Law on State Social Insurance.
Having worked with various companies where the SRS has carried out inspections, I have come to the following conclusions. The SRS bases its suspicions on the fact that taxpayers (companies) employ, for a certain period of time, without an employment contract, persons who have been employed by the company for a long and systematic period of time, because they carry out certain activities on behalf of the company within its economic activity, and because they have submitted to the instructions of an official of the company in their activities for the benefit of the company. It should be noted that the establishment of such acts may give rise to a presumption, but the employment relationship itself must be proved. Most often, the SRS does not prove this, taking the view that the establishment of the activities carried out is sufficient to establish an employment relationship, so that the establishment of other circumstances, including the establishment of remuneration, is not necessary. On the other hand, the absence of an agreement and payment of remuneration for the performance of the activities set out in the power of attorney does not indicate the existence of an employment relationship between the principal and the attorney.
Thus, to summarise the facts, in the present case the SRS has no legal basis to hold the company administratively liable under Article 159 of the SCC.
Unfortunately, the unwillingness of businesses to stand up to the prevailing mood of the SRS, in the absence of knowledge of their legal rights, makes their officials more inclined to act simply and primitively by imposing penalties rather than looking into the merits of the case. Let us remember that we live in a country governed by the rule of law and that we have an equal right to an understanding of the law. I advise you to be safe and confident that the SRS does not get the better of you with its tax shearing plan.
Source: www.ifinanses.lv
