Tax Law Notes
Tax Law Note:
Should Taxpayers Be Able to Obtain Binding Advance Rulings?
Last Updated: December 02, 2004
An advance ruling is a statement issued by the tax administration on request of a taxpayer regarding the tax consequences of one or more future transactions (and is often referred to as a private ruling).1 Public rulings—general guidance issued by the tax administration with respect to the interpretation of the tax legislation—are not covered by this note. Rulings involving two or more tax authorities are also outside the scope of this note.2
Taxpayers generally request advance rulings so as to obtain certainty with respect to the tax treatment of contemplated transactions, thereby preventing surprises. Rulings can be particularly important for large transactions or investments that hinge on the tax treatment.
Advance pricing agreements (APAs) are a special type of advance ruling where prices of goods, services, or rights between related companies are agreed upon. APAs are based on the transfer pricing rules and practices of countries and have their procedural peculiarities.3
Advance rulings present the following issues:
While in most countries taxpayers have some way of obtaining informal guidance from the tax administration, the phenomenon of formally binding advance rulings is relatively recent, although it has now been adopted by many countries.4
Many countries have established special rules in their legislation giving explicit authority to the tax administration to issue advance rulings and describing the related procedural rules.5 There are countries where there are no such explicit provisions, and where advance rulings are issued based on informal administrative practice.6 In other countries even though there is no explicit provision giving authority to the tax administration, the ruling process is significantly formalized by the tax administration's practice.7
In most countries it is the taxpayer or the taxpayer's authorized representative who can request a private ruling based on the actual facts and circumstances related to the contemplated transaction.8
A request for an advance private ruling must relate to future transactions in all countries. There are, however, cases when it may be difficult to decide when a particular transaction is a future transaction, for example when it is part of a series of transactions that has been commenced or when a binding contract to carry out the transaction has been concluded, even though it has not yet been carried out. In general terms countries consider as ineligible for an advance ruling transactions that took place in the past.9
Rulings in most countries have no legal force but are still regarded as binding on the tax administration with respect to the tax treatment of the specific transaction of the taxpayer who requested the ruling, unless the actual circumstances of the transaction turn out to be different than those described in the ruling request or if the law changes. This is especially true for countries having a formal procedure established by law for issuing rulings. Taxpayers in most countries are not bound by the conclusions of the ruling. Tax administrations in most countries have no right to revoke private rulings on a retroactive basis. In countries where private rulings do have a legal force they can only be appealed (by the taxpayer) or claimed invalid (by the tax administration) in court.10
Fashioning a Solution
Establishing a practice of private rulings in a country has several advantages. It creates a more open and direct relationship between the tax administration and the taxpayers. The availability of greater certainty as to application of the tax law can encourage investment. Also, it helps taxpayers to correctly carry out their self-assessment and decreases the chances of future litigation between tax administration and taxpayer. Basing rulings authority on provisions in the law makes the rulings practice more transparent and avoids discretionary decisions.
It is important that issuing rulings should not tie down significantly tax administration resources. This can be done, for example, by refusing to issue rulings in certain kinds of areas.11 Also, a fee may be imposed as a condition of processing a private ruling request.12
Transparency in tax administration calls for private rulings to be published. This does not make them equivalent to public rulings, since taxpayers should not be allowed to rely on private rulings in the same manner as a public ruling. In any case, because each private ruling would likely contain an extensive recitation of the facts, it might be difficult for taxpayers to argue that they are in exactly the same factual situation as the taxpayer receiving the ruling. However, even if taxpayers cannot rely on the ruling, its existence alerts them of the willingness of the tax administration to issue this type of ruling, so that they can apply for one if appropriate. Publication can also be an important check against the corrupt issuance of rulings that are not based on the law, since anyone can check the legal reasoning of the ruling and complain to the government or the legislature if an unjustified ruling has been issued.
In some countries, there is a reluctance to allow private rulings because these are seen as contrary to the rule of law: to allow the tax administration to issue binding rulings would in effect be to allow it to base taxation on its own decision rather than on the law. Moreover, there may be a concern about corruption or lack of competence on the part of the tax administration. Whether these concerns outweight the advantages of a private rulings system must be decided on the basis of the country's specific circumstances.
The series of Tax Law Notes has been prepared by the IMF staff as a resource for use by government officials and members of the public. The notes have not been considered by the IMF Executive Board and, hence, should not be reported or described as representing the views of the IMF or IMF policy.
1 See generally Advance Rulings, 84b Cahiers de droit fiscal international 22 (IFA 1999) [hereinafter Cahiers]; The International Guide to Advance Rulings, (Daniel Sandler ed., IBFD, 1997).
2For example, some countries such as Japan, Mexico, and the United States have a program of multilateral advance pricing agreements.
3Victor Thuronyi, Comparative Tax Law 212 (Kluwer 2003).
4One exception is Japan, where no written private ruling is issued by the National Tax Administration. 84b Cahiers at 465.
5The U.S. rules are very specific and detailed with respect to advance rulings. Treas. Reg. § 601.201. See also http://www.irs.gov/pub/irs-pdf/p1375.pdf .
6 For example, in Indonesia there are no general provisions regarding private rulings in the tax laws. The private ruling practice is based on internal guidelines of the tax authority. Consequently, there is no guidance on the binding force of private rulings either, thus they may not be relied on with certainty. See L. Khaw & C. Chu, 2 The International Guide to Advance Rulings, Indonesia - 7-11, (IBFD, 1997 & Supp. June 1999).
7This is the case in the Netherlands, where tax administration has formalized the procedure to such a degree that rulings now are viewed as formal. 84B Cahiers 23 (IFA 1999).
8In Australia if more than one person seeks a ruling for the same or the same type of arrangement, one person may apply on behalf of all the persons. D. Bentley, 1 The International Guide to Advance Rulings, Australia-9, (IBFD, 1997 & Supp. December 2001).
9 In Hungary transactions to be carried out in the current tax year (i.e. the one in which the ruling is requested) cannot be subject of a ruling. Gábor Földes, 1 The International Guide to Advance Rulings, Hungary-5, (IBFD, 1997 & Supp. December 2001).
10In Australia private rulings have no legal force and there is no right to appeal. They are, however, binding in effect because the Commissioner will adhere to the ruling upon assessment unless new facts are discovered. D. Bentley, 1 The International Guide to Advance Rulings, Australia-15, (IBFD, 1997 & Supp. December 2001). In Brazil a right to appeal exists only if an issued ruling conflicts with an earlier ruling based on similar facts. L.F. Teixeira Pinto & C.H. Tranjan Bechara, 1 The International Guide to Advance Rulings, Brazil-21, (IBFD, 1997 & Supp. December 1998). In Mexico rulings are considered government acts, therefore they are binding both on tax administration and taxpayers indefinitely until the law changes. Rulings may not be revoked or appealed, and may only be attacked by either party in court. R. Gonzalez Orta & K. Perez Delgadillo, 2 The International Guide to Advance Rulings, Mexico-11, (IBFD, 1997 & Supp. June 1999).
11In the U.S., the Internal Revenue Service publishes a list of subject areas in which it has adopted a "no-ruling" policy. In 2001, these lists were updated in Rev. Proc. 2001-3 (Domestic) and Rev. Proc. 2001-7 (International). C.S. Triplett et al., 3 The International Guide to Advance Rulings, United States -18, (IBFD, 1997 & December 2001).
12In Hungary the fee for a private ruling is 1% of the taxable income involved or HUF 250,000 (approx. USD 1,327), whichever is higher. Gábor Földes, 1 The International Guide to Advance Rulings, Hungary-7, (IBFD, 1997 & Supp. December 2001). In New Zealand the initial fee is NZD 310 (approx. USD 217) (including GST). If consideration of an application is expected to exceed 2 hours, additional fees at the rate of NZD 155 (approx. USD 108) (including GST) per hour (or part hour) are payable. Kevin Holmes, 2 The International Guide to Advance Rulings, New Zealand -32, (IBFD, 1997 & Supp. December 2001). In the Slovak Republic the fees are SKK 200 (approx. USD 6.5) payable when the ruling request is made (Act 145/1995 Coll. On Administrative Fees). J.Polóny, 3 The International Guide to Advance Rulings, Slovak Republic -13, (IBFD, 1997). In Sweden, only for rulings concerning direct taxes, the fee ranges from SEK 600 to SEK 10,000, (approx. USD 87 to USD 1,445) depending on the amount involved and the complexity of the issue. In very special cases the fee may be reduced or remitted. N.C.Von Koch & A. Olrog, 3 The International Guide to Advance Rulings, Sweden -21, (IBFD, 1997 & September 1999). In Mauritius, the fees are MUR 1,000 (approx. USD 35) for an individual and MUR 5,000 (approx. USD 176) for any other person. Raffeek Sham, 2 The International Guide to Advance Rulings, Mauritius-19, (IBFD, 1997 & December 2001). In Iceland, a fee of ISK 10,000 (approx. USD 149) is payable when a person files a request for a ruling from the Director of Internal Revenue. An additional fee is levied based on the time spent on the ruling, although the total charge cannot exceed ISK 40,000 (approx. USD 595). G. Valdimarsson, 2 The International Guide to Advance Rulings, Iceland -18-20, (IBFD, 1997 & December 2001). In Hong Kong, the minimum fee for a request for a ruling on the source of profits is around USD 4,000. In other cases, the minimum fee is around USD 1,300. If the work involved for the Inland Revenue Department in providing a ruling exceeds a certain amount, additional hourly rate fees are payable. These fees range from USD 130-170 per hour. R. Cullen, 1 The International Guide to Advance Rulings, Hong Kong -28, (IBFD, 1997 & December 1998). In India, the fee for an advance ruling is INR 2,500 (approx. USD 55) regardless of the amount of tax involved or the complexity of the issue. Dr V.N. Lalithkumar Rao et al., 2 The International Guide to Advance Rulings, India -25, (IBFD, 1997 & September 2000).