In recent years, the use of the “Pre Ruling” (Pre Ruling) or advance tax rulings has become increasingly common as a tool for taxpayers – both individuals and corporations – to avoid uncertainty in the taxation of future transactions or economic actions. This tool, which is part of the services provided by the Tax Authority, enables the applicant to receive clear and unequivocal answers regarding the tax implications of certain actions before executing them, thereby reducing the risk of unexpected tax exposures.
Definition of Pre Ruling and Legal Authority for Issuing Advance Tax Rulings
A Pre Ruling is a process in which a taxpayer submits a request to the Tax Authority for an answer regarding a tax issue that does not have a clear answer in the tax laws or existing tax circulars. This process provides the taxpayer with absolute certainty regarding the tax implications of an action or transaction they are considering, allowing them to plan their steps intelligently and make optimal strategic decisions.
The authority to issue advance tax rulings stems from the legal provisions of Sections 158b to 158v in Part 9 of the Income Tax Ordinance, which grants the Director of the Tax Authority the right to issue tax rulings on various issues related to future transactions. These sections stipulate that the Director of the Tax Authority may provide an official response to the applicant, which will have legal validity, but may not necessarily be published publicly.
Advantages of Using Pre Rulings
- Tax Certainty: The primary advantage of the Pre Ruling process is the ability to obtain a clear and unequivocal answer on ambiguous tax issues. In cases where the provisions of the law are unclear or require specific interpretation, this process enables the taxpayer to know in advance the expected tax liability in a transaction or action, which can save unnecessary expenses and even prompt renegotiation if the potential tax burden makes the transaction unfeasible.
- Effective Tax Planning: Through Pre Rulings, corporations, multinational companies, and individuals can plan their business steps in the most efficient way regarding tax liability. Large entities that need to make strategic decisions regarding future moves can rely on an advance tax ruling to know with certainty the financial implications of these moves.
- Cost and Time Savings: This process reduces the risk of additional expenses by maintaining transparency with the tax authorities. By doing so, it avoids exposure to extra costs such as interest and linkage adjustments that may arise in a regular assessment process. Additionally, because the tax rulings are given in advance, the applicant can understand the expected tax liability and influence the feasibility of the transaction or action.
- Transparency with the Tax Authority: The Pre Ruling process operates transparently and openly with the Tax Authority, reducing the risk of unnecessary audits or future tax investigations. This enables the taxpayer to carry out their transactions or actions in an orderly manner, fully aware of the tax implications.
The Process of Submitting an Advance Tax Ruling Request
Submitting a request for an advance tax ruling requires the applicant to provide all relevant documents, including the details of the transaction or action they wish to perform, which have tax implications. Upon receiving the request, the Tax Authority must give the applicant the opportunity to present their arguments and provide additional information as needed.
After the ruling is issued, if it is given under an agreement, it cannot be appealed. However, if it is not part of an agreement, the applicant may appeal the ruling as part of an appeal on the tax assessment. In any case, the Tax Authority is obligated to act in accordance with the ruling unless it is revealed that false or incorrect information was provided.
The Legal Status of an Advance Tax Ruling
An advance tax ruling is not a contract between the parties, but it holds legal validity and obligates the Tax Authority to act accordingly. However, if the taxpayer chooses to act in a manner inconsistent with the ruling, they are required to explain this deviation in their financial reports.
Summary
The Pre Ruling process is an important and useful tool for taxpayers who wish to avoid uncertainty regarding the tax implications of their actions. Using advance tax rulings helps taxpayers – whether small businesses, medium-sized enterprises, or large corporations – make informed decisions, reduce financial risks, and optimally manage their tax liabilities. Moreover, these rulings assist in maintaining transparency with the tax authorities and avoiding unexpected economic consequences in the future.
Ish-Shalom & Co. Law Office specializes in representing taxpayers before the professional departments of the Tax Authority, providing expert advice and representation in tax matters, including assisting with the submission of advance tax ruling requests while ensuring privacy and offering personalized advice to guarantee the best outcome for clients. We would be happy to assist you with these processes and other matters related to taxes and representation before the Tax Authority.
If you have any further questions or need assistance with the Pre Ruling process, I am here to help!
