Introduction

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:

• is the authority to issue rulings based on a specific statutory or regulatory provision (formal rulings)?
• what scope can rulings have?
• do they have binding force?
• can the taxpayer appeal against a refusal to issue a ruling on the terms requested?

Country Practices

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.