In this article we will discuss about the advance tax rulings: 1. Meaning of Advance Tax Rulings 2. Country Examples of Advance Tax Rulings.
Meaning of Advance Tax Rulings:
Many countries provide advance tax rulings (“ATR”) today. These rulings are issued either under a formal legislation by a separate body (Examples: India, Sweden) or given by the tax authorities with or without any statutory obligation.
Typically, the ruling is given on application before undertaking a transaction, although some jurisdictions grant rulings on completed transactions. An OECD Report issued in 2004 defined a ruling as “any advice, information or undertaking provided by a tax authority to a specific taxpayer or a group of taxpayers concerning their tax situation and on which they are entitled to rely”.
Advance tax rulings may be public or private rulings. The tax authorities provide public rulings or opinions on general or specific tax issues. These public rulings inform the taxpayer on broadly described situations, and may not be legally binding.
They deal with administrative practices and procedures and give their interpretation of the tax laws. Such rulings are usually published and can be applied by the taxpayer without making an application for a ruling.
These public rulings do not deal with specific situations. On the other hand, private rulings are “a statement issued, upon request, to a (potential) taxpayer indicating the tax administration’s view of the tax treatment of a particular set of facts and circumstances contemplated, in the process of completion, or completed but not yet assessed”.
Private rulings provide tax certainty to taxpayers in their tax planning. On latter transactions, they avoid additional tax costs from litigation, penalties and interest. The tax authorities also benefit through reduced compliance workload and improved tax administration.
Such rulings may be binding on the tax authorities for a specific taxpayer, provided all the relevant facts are fully disclosed, and the transactions follow the ruling request. Since they are personal rulings, they may not be directly applicable to other taxpayers but may provide guidance to them in similar circumstances.
An effective private ruling system should contain several features. For example, the taxpayer should be offered an opportunity to obtain an advance ruling on the tax consequences of bona fide transactions within a reasonable time. It should be given at least in cases of general legal importance or if they are of material significance to the taxpayer.
The taxpayer should be able to negotiate with the authorities and either amend the transaction or withdraw the application before a negative ruling is issued. The fiscal authorities (and the courts) should be bound by the advance ruling upon which a taxpayer has relied in good faith.
Any subsequent change in the law should be applied as far as possible without retrospective effect. The advance rulings should be published to ensure the uniform application of law.
Other desirable factors require that the grant of the private tax ruling should be obligatory under the law and not left to the discretion of the tax authorities. It should be issued at no cost to all taxpayers as a legal right. Exceptional circumstances when it may be refused should be explicitly defined by statute.
There should also be a right of appeal in cases of delayed or no rulings and adverse rulings, wherever this is administratively and legally practicable. Moreover, the opportunity to obtain the advance rulings should neither be limited to special problems nor to certain taxes, but be provided on all taxes and tax issues.
Thus, some questions to ask on advance tax ruling systems are:
a. Is there a ruling practice? Who can apply for a ruling? What is the scope and legal basis for the rulings? What tax areas and issues or types of transactions can they cover? In what circumstances must a ruling be granted? In what circumstances can a ruling be refused or not given? Can the taxpayer appeal against a refusal to give a ruling?
b. What are the procedures for requesting a ruling? Who should it is submitted to, and in what form? When should it be made (pre or post transaction)? Are there any charges levied? What is the time limit for obtaining a ruling? Can a taxpayer appeal against a delay in the grant of a ruling or a decision not to give a ruling?
c. Is the ruling legally binding on the tax authorities? Is it binding on the taxpayer? To what extent, is it binding? Is there a time limit for the binding period? Are legal rulings binding on the courts?
d. Can a taxpayer modify or withdraw a request for a ruling? When can a ruling be withdrawn? What is the effect of judicial decisions or changes in tax laws? Can the authorities revoke or modify a ruling previously given? Is there any protection given to the taxpayer in such cases? Can a taxpayer appeal against an adverse ruling?
e. In what circumstances are rulings made public or published? Can they be relied upon by other taxpayers as tax precedents on other transactions? Can they bind similar or continuing transactions by the same taxpayer or similar transaction by other taxpayers?
f. Are advance rulings given on transfer pricing issues, e.g. advance pricing arrangements?
Private rulings may not be worthwhile in all cases. They normally require full disclosure of the proposed transaction or transactions, and could involve time-consuming preparation of the application and negotiations with the authorities.
In situations involving contentious interpretations on tax legislation, the ruling may be conservatively given by the tax authorities, and without an appeal procedure. In some countries, it is possible to withdraw a ruling application, but this may not always be permitted. An adverse ruling may become binding on the taxpayer and lead to tax litigation.
An advance pricing arrangement (“APA”) is “an arrangement that determines, in advance of controlled transactions, an appropriate set of criteria for the determination of the transfer pricing for those transactions over a fixed period of time”.
These arrangements are similar to mutual agreements, as defined in OECD MC Article 25. No appeal is normally allowed and they have no value of precedence. Their validity period is not fixed and usually varies from three to six years.
An APA differs from an ATR. ATR deals primarily with legal aspects of a single transaction based on the facts presented by the taxpayer, while APA requires a detailed review and verification of the factual assumptions underlying several transactions.
Often, they cover several transactions, several types of transactions on a continuing basis, or all of a taxpayer’s transactions for a given time period. The APA application normally accompanies detailed documentation on the methodology, assumptions and predictions of future events on which the proposed transfer pricing is to be based.
While ATRs tend to be unilateral and do not have to involve or be communicated to the tax authorities of another country, an APA on transfer pricing issues may be unilateral, bilateral or multilateral. Wherever possible, it should be concluded on a bilateral or multilateral basis to ensure that it is binding on the other tax authorities affected by the arrangement.
Country Examples of Advance Tax Rulings:
The Taxation Ruling (Public) System gives the views of the Australian Tax Office (ATO) on various tax issues. A binding public ruling procedure was introduced in 1992 to support the self-assessment tax system. The public rulings are published.
The criteria for the grant of a public ruling are as follows:
(i) It should provide an interpretation, guideline, precedent, practice or procedure to be followed on decisions that affect the rights and liabilities of taxpayers;
(ii) It should establish a new or revised interpretation of administration of tax laws; and
(iii) It should affect all the taxpayers or a section of the taxpaying community.
Advance private rulings are also given. Like public rulings, these private rulings are legally binding on the tax authorities. They apply only to the applicant for a proposed transaction under the given facts and for specific fiscal years. The taxpayers have a right of appeal on an adverse ruling given by the Commissioner.
Advance private ruling requests will only be considered if:
(i) The relevant parties to a proposed transaction are identified by name and address;
(ii) The transactions are seriously contemplated and not hypothetical;
(iii) All material facts are made known;
(iv) The specific legislative provisions are specified and the request addresses such questions, i.e. it is not used as a free tax research or advisory bureau;
(v) All relevant documents (including drafts) are made available for examination; and
(vi) The relevant details, in case the request is submitted to any other branch or section of the tax department for interpretation.
Tax rulings may be withdrawn, if the transaction and the year to which they relate have not begun, in the following situations:
(a) The applicable laws have changed since the issue of the ruling,
(b) The interpretation has changed or been modified by relevant tribunal or court decisions, or
(c) The ruling is no longer appropriate for commercial, administrative or legal reasons. Any changes in interpretation tend to be prospective.
Canada introduced its advance tax ruling system as early as 1970. There is no legal provision for the tax authorities to issue private rulings. However, the tax authorities give rulings on bona fide business transactions that are seriously contemplated. It could include questions of fact where it is possible to determine all the material facts, and where the facts can reasonably be expected to prevail.
The transaction must be completed within the stipulated period, unless the tax department confirms the validity for future periods. The ruling is only binding on the authorities for the taxpayer to whom it is issued.
There is a list of circumstances when rulings may be denied. For example, if there is a material omission or misrepresentation of the facts or purpose, the rulings can be revised retrospectively. They can be revoked without notice from the date of change or a Court ruling if there is a change in the law or a differing ruling.
They may be revoked prospectively only in cases when there is a change in the tax department’s practice or the ruling is in error and a notice of revocation is given. There is no right of appeal, but there are procedures for reconsideration or withdrawal of rulings. The rulings are published.
India introduced a system of advance tax rulings in 1993 for non-resident taxpayers. It established an Authority for Advance Rulings with prescribed powers and procedures under the domestic tax law. The Authority can deal with questions of both law and fact.
The tax issues could refer to any existing or proposed transaction, which does not involve:
(i) Matters pending before a tax authority, tribunal or court, or
(ii) The determination of the fair market value of property, or
(iii) Transactions designed prima facie for the avoidance of taxes. The ruling must be given within six months. It is binding on both the taxpayer and the tax authorities, unless there is a change in the law or facts. There is no right of appeal. Moreover, the ruling does not set a precedent.
In 1999, the Indian Government extended the benefits of the advance ruling procedure to:
(i) State-owned companies and
(ii) Resident taxpayers in relation to past or proposed transactions with a non-resident taxpayer Rulings are published.
The Netherlands has well-established procedures for rulings on domestic and international tax issues. Private rulings are given under an open system for non-standard tax situations. The rulings cannot extend the tax law but can confirm the tax consequences on specific transactions.
Any tax officer qualified to make tax assessments can give advance rulings on domestic tax issues. However, international rulings on corporate tax issues follow a standardised format and the authority is limited to the Rotterdam Inspectorate for the entire country.
Advance Tax Rulings (ATR) may be requested for:
(i) The application of the participation exemption, provided none of the subsidiaries of the holding company carries on business activities in the Netherlands,
(ii) International structures involving hybrid financial instruments or hybrid entities, and
(iii) The determination of whether or not a foreign company has a permanent establishment in the Netherlands.
The rulings are legally binding for four to five years but longer periods may be granted in special circumstances. The rulings can be overruled if the facts change. Third parties can rely upon the rulings. No ruling are granted if there is an abuse of law, or if the grant of such a ruling would be in contravention of the good faith that (tax) treaty partners owe each other.
The Dutch ruling practice was significantly changed by several Decrees issued in March 2001. On August 10, 2004, amended versions of these Decrees, except for the Decree on hybrid loans, were issued. These new measures were primarily aimed at conduit finance structures, which had little or no substance or business risks.
Under these new Decrees, an ATR will not be given for non-qualifying group service companies and for hybrid instruments or entities that are used primarily for tax avoidance purposes. Group services are defined as intercompany transactions comprising, legally or actually, directly or indirectly, largely receipt and payment of interest and royalties within the group under any name or in any form.
These new rules replace the old interest and royalty rulings.
In order to prevent the abuse of the Dutch tax system there must be real substance, local management and control, and a physical presence. For example:
1. The board of directors of the company must have the authority to bind it and be responsible for its actions. At least half of its managing directors should be resident in the Netherlands; moreover, the managing directors should have the professional skills required for the operation of the business.
2. Important management decisions must be taken in the Netherlands, and the company must have qualified staff at its disposal to allow the company to function.
3. The main bank account must be kept in the Netherlands, and the bookkeeping must be performed in the Netherlands. The equity capital of the company must be adequate for the activities performed by the company.
4. The company must have met its fiscal obligations, i.e. filing tax returns and paying tax due. It must be resident in the Netherlands and must not be dual resident for tax purposes.
A ruling may still be obtained if the taxpayer agrees to a spontaneous exchange of information with the source State of the interest and royalties. The 2004 amendment states that the ruling on conduit financing structures will only be granted in combination with an advanced pricing agreement.
The new Decrees also provide rules governing unilateral, bilateral and multilateral APAs.
The tax authorities issue non-binding policy statements in three forms as interpretation statements, interpretation guidelines and standard practice statements.
In addition, New Zealand provides three types of advance tax rulings:
(i) Public rulings are initiated by the tax authorities on specific issues. They apply to a particular arrangement and how the taxation laws apply to that arrangement. They can be for a set period of time or indefinitely.
(ii) Private rulings are issued to taxpayers on a particular arrangement or transaction. They can be pre-transaction, ongoing or for a completed transaction. Private rulings are binding but not published. A cost-based fee is charged for private rulings.
(iii) Product rulings are given to decide the application of certain tax provisions on specific taxable products that potentially involve a class or group of people. Generally, they are requested by the promoters of financial products to clarify the tax consequences.
The Council for Advanced Rulings gives rulings at its discretion on the consequences of proposed transactions. The Council can issue rulings on both direct and indirect taxes, and relate to domestic or international tax issues. In practice, they address questions concerning legal interpretation only. A ruling is not given on matters affecting property valuation, or if the answer is either obvious or can be found in the law or the case laws.
The rulings are not binding on the taxpayer, but they are binding on the tax authorities, provided the relevant law and conditions remain unchanged. Both parties have the right of appeal. It generally takes 6 to 8 months to get a ruling. The taxpayer has no legal right to obtain a ruling, but normally receives it on material issues of tax law interpretation or judicial practice. The rulings are not published.
There is no statutory or published administrative procedure on tax rulings. In practice, the Inland Revenue publishes its interpretations on the application of various tax provisions, and gives informal private rulings and tax advice. A taxpayer can make an application to the Revenue.
In the late 1990s, the Inland Revenue decided against a formal system of pre-transaction rulings, since it concluded that it would require onerous disclosures by the taxpayer and would be expensive. The Inland Revenue is currently considering the issue of rulings for completed transactions under the self-assessment system. They will be binding on the Revenue, but with no right of appeal on adverse rulings.
The Internal Revenue Service has established various procedural guidelines for the issue of advance rulings on federal taxes. In certain cases, a favourable ruling may be mandatory either before (e.g. change in accounting method or period) or after the transaction.
The Internal Revenue Service gives “private letter rulings” to clarify or confirm the tax consequences of particular transactions. These rulings apply to specific taxpayers. Rulings are granted on legal but not factual issues. The request can relate to any federal tax but must address the tax implications of contemplated future transactions.
A taxpayer may rely on the advance ruling, but it is not binding on him. The tax authorities are obliged to publish the advance rulings in a redacted form that obscures information that could identify the requesting taxpayer. However, the published rulings cannot be taken as precedent by any other taxpayer.
The taxpayer does not have any legal rights to receive a ruling, which may be refused on many issues. The tax authorities issue periodic lists (“no rule lists”) of particular legal issues on which advance rulings may not be obtained.
These situations include when:
1. There is a lack of a bona fide business purpose or the prime motive is to reduce federal tax; moreover, the ruling is not granted where the issue is factual in nature.
2. The issue is under a tax audit or pending litigation, or it relates to a completed transaction after the tax return has been filed for the year.
3. Hypothetical situations or part of a proposed transaction, or if the matter involves alternative plans of proposed transactions.
4. The taxpayer withdraws the request before the formal reply is given.
5. The requests by foreign governments on the US tax effects of their laws.
6. The effect of proposed legislation (whether federal, state or foreign).
7. Eligibility to claim benefits under the Limitation of Benefits provision of a treaty or issues under competent authority relief.
8. Certain inherently factual issues, such as whether a foreign taxpayer is doing business in the United States.
Retroactive revocation or modification by the tax authorities is permitted, but rarely made if
(i) There has been no misstatement or omission of material facts;
(ii) The transaction accorded with the ruling in material respects;
(iii) There is no change in the applicable law; and
(iv) The taxpayer acted in good faith in relying on the ruling and the retroactive revocation would be detrimental to him.