• The Role Of Binding Rulings In The Tax System

    By Ksenija Cipek

    19-02-2019

    Authors: Ksenija Cipek and Iva Uljanić Škreblin.

    I About Binding Rulings

    Binding rulings1 provide legal certainty for taxpayers, for example by explaining how to interpret and apply national tax legislation on transactions and structures in complex situations that can be purely domestic or cross-border. Legal certainty is an important factor in making economic or investment decisions. Tax rulings provide clarity not only from the perspective of the taxpayer but also to the tax authorities for which such opinions are binding.

    Binding rulings, as a measure of voluntary fulfillment of tax obligations, have been applied for many years in a large number of countries. For example, 22 EU Member States have some form of binding rulings, some more formalized, with well-defined rules and for precisely defined purposes, others less, etc. However, apart from the positive side of that measure, these rulings are, in some countries, also used for aggressive tax planning, or reduction of tax liabilities. Public attention in the negative context attracted tax rulings in November 2014 when a financial scandal called "LuxLeaks" was revealed, a journalistic investigation by the International Consortium of Research Journalists. It is based on the disclosure and announcement of confidential information on Luxembourg's tax rulings issued in the period from 2002 to 2010 for more than 300 multinational companies in Luxembourg. The publication has attracted international attention due to the schemes that enabled tax evasion, in Luxembourg and elsewhere.

    The journalist's investigation revealed that tax rulings were compiled by large accounting firms for the benefit of their clients, multinational companies, and then approved by the Luxembourg Tax Administration. Tax rulings included schemes for the transfer of profits in Luxembourg, and one of the mechanisms, used by multinational companies to redistribute profits, were the transfer pricing. Loan within the group was another possible mechanism: a home based company with a high tax rate gave a low interest rate loan to a subsidiary in Luxembourg. A subsidiary in Luxembourg was usually established for the purpose of lending at a high interest rate, for example 9%, back to another subsidiary outside Luxembourg. Since the tax regime in Luxembourg is adapted to be favorable for multinational companies, this profit is taxed at very low rates. In many cases the presence of companies in Luxembourg was only symbolic. For example, 1600 companies were registered at the same address.

    Since then, the European Commission has begun to analyze binding rulings issued by Member States, with a focus on Luxembourg, and in several cases initiated the procedure and found that it was State Aid and that the multinational companies, that used it, had to pay taxes which they "saved". Namely, tax rulings in themselves do not represent a problem under State Aid rules, however, if such opinions result in the granting of a selective advantage to a particular company or group, such distortion of competition in the common market means a violation of the State Aid rules.

    In addition, Commissioner Pierre Moscovici introduced a Package on Tax Transparency in March 18, 2015, which consisted mainly of establishing a system of automatic exchange of information on previous tax rulings between tax administrations of Member States. Only 7 months after the European Commission presented its proposal, agreement was reached on Council Directive (EU) 2015/2376 of December 8, 2015 amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (OJ 332/1, here in after: the Directive). On the basis of that Directive, from 2017, Member States' tax administrations are obliged to exchange data twice a year, with other Member States and the European Commission, on issued previous tax rulings with cross-border effects and advance pricing agreements.

    The work on aligning the rules for tax rulings continued in the working group Code of Conduct for business taxation, although earlier in this group were discussed about tax rulings, and two guidelines were agreed in 2010:

    • "Guidance on the Identification of Harmful Rulings", whereby these tax rulings relate to the prior interpretation or application of tax provisions by a tax administration for a particular event or for a particular taxpayer. The group agreed in November 22, 2010 to:
      • to initiate a review procedure in relation to administrative practice, Member States are invited to share with the Group their knowledge or suspicion of harmful administrative practices of other Member States,
      • the criteria for assessing the harmfulness of administrative practice refer to the five criteria prescribed in paragraph B of the Code.

      The Guidance also invite Member States to spontaneously exchange information on cross-border tax rulings with other Member States for which such rulings might be relevant.

    • "Guidance on Improvements in the Field of Transparency" - The Group agreed in May 25, 2010 to:
      • to the extent that a Member States accommodates the advance interpretation or application of a legal provision to a specific situation or transaction of an individual taxpayer, the underlying procedures should be embedded in a transparent legal and administrative framework, that is public legislation or administrative guidelines,
      • where the advance interpretation or application of a legal provision to a specific situation or transaction of an individual taxpayer is suitable for horizontal application in similar situations, this interpretation or application should be published or be reflected in updated guidance, or be made otherwise publicly available.

      Further, in November 2016, the Group agreed on the "Guidelines on the Conditions and Rules for the Issuance of Tax Rulings - Standard Requirements for Good Practice by Member States". The Guidelines relate to any ruling which includes advice, information or interpretation, provided by the tax authority of a Member State or any other territorial or administrative entity, to the taxpayer or the group of taxpayer, relating to their tax situation and to which they are entitled to invoke. It should be noted that the Guidelines apply both to binding rulings in general and to advance pricing agreements. However, in order to reduce the administrative burden for Member States, the Guidelines will not apply to exclusively domestic tax rulings issued to a particular person or group of persons, excluding those who mainly deal with financial or investment activities, with total annual net turnover at the level of the whole group less than EUR 40 million in the fiscal year preceding the date of issue, amendment or renewal of the ruling.

      The Guidelines cite the following recommendations regarding the process of issuing rulings:

      • official rules and administrative procedures for rulings should be identified in advance and published, and they should include: (i) the conditions for the applicability of the ruling process; (ii) the grounds for denying a ruling; (iii) the fee structure, if applicable; (iv) the legal consequences of obtaining a ruling; (v) possible sanctions for incomplete or false information provided by a taxpayer; (vi) the conditions for revoking, cancelling or revising a ruling; and (vii) any other guidance that is deemed necessary in order to make the rules sufficiently comprehensive and clear to taxpayers and their advisors,
      • tax rulings should be issued, and any administrative discretion in granting a ruling should be exercised, only within the limits of, and in accordance with, the country’s relevant domestic tax law and administrative procedures, and should be limited to determining how that law and/or any administrative procedures apply to one or more specific operations or transactions intended, planned or undertaken by the taxpayer,
      • tax rulings should respect applicable international obligations that are incorporated into domestic tax law, for instance, obligations under relevant bilateral treaties and EU law,
      • tax rulings should be issued in writing,
      • tax rulings should only be issued by the competent government office or authority in charge of this task. Where a ruling is granted by another government office, it should be subject to approval by the competent office,
      • it is recommended that at least two officials are involved in the decision to grant a ruling or there is at least a two-level review process for the decision, in particular in cases where the applicable rules and administrative procedures explicitly refer to discretion or the exercise of judgement by one of the relevant officials,
      • tax rulings should be binding on the tax authority (to the extent permitted by domestic law and the principle of legitimate expectation), provided that the applicable legislation and administrative procedures and the factual information on which the ruling is based do not change after the ruling has been granted.
      • taxpayers should apply for a ruling in writing and provide a full description of the underlying operations or transactions for which a ruling is requested. The information should be included in a file supporting the ruling application (the “ruling file”). The ruling file should also include information on the methods and facts for determining the key elements of the tax authority’s view. Any additional information or relevant facts which are brought to the attention of the tax authority (i.e. in meetings or oral presentations) should be recorded in writing and also be included in the ruling file,
      • information concerning the applicant (including taxpayer’s name, tax residency, tax identification number, commercial register number for corporations and companies) and tax advisor/tax consultant involved should be included in the ruling file and/or the ruling itself,
      • before taking a decision, the person/s providing the ruling should check that the description of the facts and circumstances is sufficient and justifies the envisaged outcome of the ruling. They should also check that the ruling outcome is consistent with any previous rulings concerning similar legal issues and factual circumstances,
      • in the area of transfer pricing, Member States should also apply the EU guidelines for advance pricing agreements published in the annex to the Commission Communication of 26 January 2007 (COM(2007) 71 final).

      Furthermore, the following element in the Guidelines refers to recommendations for time limits for issuing rulings and on procedural supervisory and review procedures:

      • the advance pricing agreement should only be for a fixed period of time and should be subject to review before being extended,
      • taxpayers should notify the tax authority about any material changes in the facts or circumstances on which a taxpayer-specific ruling (including an APA) was based, as soon as possible so that the tax administration can assess whether to exchange this information with another country. As part of this notification process, taxpayers should notify tax administrations of any material changes to the related parties with which they transact (for transactions covered by the ruling) and any other changes which would impact on who information should be exchanged with,
      • effective administrative procedures should be in place to periodically verify that the factual information relied upon and assumptions made when granting taxpayer-specific rulings remain relevant throughout the period of validity of the ruling. This may be particularly necessary in the case of APAs where any underlying assumptions and decisions could be affected by changes in economic circumstances,
      • rulings should be subject to revision, revocation or cancellation, as the case may be, in the following circumstances:
        • if the taxpayer makes a misrepresentation or omission in applying for the ruling that calls into question the validity of the ruling,
        • if the relevant laws change,
        • if there is a relevant and significant change (i) in the facts or circumstances upon which the ruling was based or (ii) in the validity of the assumptions made

      In addition, the Guidelines also provide recommendations for the exchange of information and public disclosure of opinions in cases of horizontal applicability of rulings to other taxpayers or similar situations, whether full rulings are disclosed or only summary or conclusions, and in the cases where there is a rule in national law protection of personal data, it is recommended to publish an ruling in anonymous form, ie without providing any information on the taxpayers whose opinion was issued.

      II Rules for issuing binding rulings in Croatia

      According to the General Tax Code (OJ 115/16 and 106/18), a tax authority is obliged to make a binding ruling on the tax treatment of future and intended transactions, ie business events and taxpayer activities at the written request of the taxpayer.

      ✔Areas of application of binding rulings

      Deleting of topics that have so far been determined by the General Tax Act for binding rulings are aimed at encouraging the more frequent use of this institute. With the Proposal of the Ordinance on the Implementation of the General Tax Law, which has been sent to the public discussion, topics that may be subject to binding rulings are no longer defined, and if such a Proposal will be confirmed by the Minister of Finance, the binding ruling may be issued for any tax topic to the above legal requirements (for future and intended transitions).

      The Tax Administration does not issue a binding ruling if:

      1. the applicant's request does not apply to future and intended transactions or business events and activities of the taxpayer,
      2. the request of the applicant relates to the subject of the initiated tax audit or the subject of a court procedure relating to the request for issuance of a binding ruling or legal remedy procedure,
      3. the applicant's request relates to a general or hypothetical question,
      4. it follows from the contents of the applicant's request that there is no real intention to undertake the business activities that are the subject of the request,
      5. it is the subject of the request that is decided on within the right to information, according to a special regulation,
      6. the applicant did not pay the costs of issuing the binding ruling after the deadline in the written invitation of the Tax Administration.

      ✔ The procedure for issuing binding rulings

      According to the Proposal of the Ordinance on the Implementation of the General Tax Law, the procedure for issuing binding rulings includes several stages:

      1. submitting a request for the issuance of binding ruling,
      2. previous meeting/conversation,
      3. withdrawal of requests,
      4. the issuing deadlines and the content of the binding ruling.

      The procedure thus begins by submitting a request for issuing binding ruling which the taxpayer submits to the Tax Administration electronically or in exceptional writing.

      The Tax Administration may make a invitation to the applicant to hold the previous conversation. The previous conversation verbally clarifies the facts and circumstances of issues that might be the subject of binding ruling. The invitation has to be sending no later than 30 days from the date of submission of the request.

      The applicant may, in writing, withdraw from the request at any time prior to the issuance of the binding ruling, without the right to reimbursement of the paid costs, or, in exceptional circumstances, the right to reimbursement of the paid costs, provided that the Tax Administration has not commenced work on the issuance of binding ruling.

      The binding ruling must contain the questions, answers, facts and legal analysis of the presented case, ie transaction, business event or activity.

      Once the binding ruling is signed and delivered to the taxpayer, the ruling becomes obligated to the Tax Administration and, as a rule, it is valid for a change of fact, ie the legal provisions on which it is based and is not issued for a certain period of time.

      The fact that the ruling is binding on the Tax Administration does not mean that the Tax Administration will not continue to keep track of that taxpayer and determine whether or not the taxpayer has complied with the binding ruling, or whether the assumptions and circumstances on which the ruling is based are changed.

      According to the Proposal, the Tax Administration is obliged to issue a binding ruling within 90 days from the date of filing the full application, but may, given the complexity of the matter, extend this deadline for another 45 days and longer. Exceptionally, when the Tax Administration, with regard to the complexity of issuance of binding ruling, has to include other bodies (institutions) in the country or abroad, for the purpose of obtaining information essential to the issuance of binding ruling, binding ruling can be issued after the expiration of these deadlines (90 or 135 days), but must explain the reasons for the extension in binding ruling.

      ✔ Cessation of validity

      Binding ruling shall cease to be valid if:

      1. it is based on the provisions of the regulations that have been amended or have ceased to exist, based on which the ruling was issued,
      2. there have been changes in circumstances that have a significant impact on the binding ruling,
      3. it is determined that the binding opinion is based on untruthful or incomplete information.

      ✔ Cost of issuing binding rulings

      The cost for issuing the binding ruling is entirely borne by the applicant. The Tax Administration shall in writing invite the taxpayer to pay the costs of issuing the binding ruling. The expiration date for the paying a cost of issuing the binding ruling is 10 days from the date of the invitation.

      The costs of issuing a binding ruling depend on the income of the taxpayer shown in the last submitted annual tax declaration:

      Income requirement Costs
      1. Up to HRK 3.000.000 (aprox. EUR 400.000) HRK 5.000 (aprox. EUR 700)
      2. From HRK 3.000.000 to HRK 7.000.000 HRK 7.000
      3. From HRK 7.000.000 to HRK 10.000.000 HRK 10.000
      4. From HRK 10.000.000 to HRK 20.000.000 HRK 13.000
      5. From HRK 20.000.000 to HRK 70.000.000 HRK 15.000
      6. From HRK 70.000.000 to HRK 110.000.000 HRK 20.000
      7. From HRK 110.000.000 to HRK 150.000.000 HRK 25.000
      8. Higher than HRK 150.000.000 HRK 30.000
      9. applicants who start or have started business in the taxable period in which the claim is filed, natural or legal persons who have not yet acquired the status of taxpayer or have not yet completed the registration of the activity according to special regulations HRK 5.000

      III Revision of the Dutch ruling practice

      Revision of the Dutch ruling practice for tax rulings with an international character (“international tax rulings”), aimed to become effective as from 1 July 2019.

      The Dutch government envisages to revise the Dutch ruling practice for international tax rulings, i.e. advance pricing agreements (APA's), advance tax rulings (ATR's) and all other tax rulings which need to be exchanged under EU Directive EU 2015/2376. This revision aims to further improve the quality of the ruling practice for companies with 'real activities' and to increase the robustness thereof. The measures announced by the State Secretary of Finance relate to the requirements that should be met to obtain an international tax ruling, transparency, and the issue process.

      Under the revised Dutch ruling practice, an international tax ruling can only be obtained by companies that have an 'economic nexus' with the Netherlands. This new economic nexus concept replaces the current (minimum) Dutch substance requirements that need to be met to obtain a tax ruling. Economic nexus concerns economic operational activities that are actually performed for the account and risk of the company in the Netherlands. The activities should match the company's function within the group and there should be sufficient relevant personnel available in the Netherlands for these activities, which should be proportional to the total personnel of the group. The operational costs of the company should also be proportional to the activities that are carried out in the Netherlands. Further administrative guidance on the economic nexus concept, including examples thereof, will be provided through a policy decree.

      In addition, international tax rulings will not be granted for transactions that involve companies that are tax resident in a state that is included on the EU list of non-cooperative jurisdictions or which is qualified as a low-tax jurisdiction (i.e. have a corporate tax rate lower than 9%).

      All international tax rulings will have a standardized format ("determination agreements" which are binding on both the tax authorities and the taxpayer) and a maximum term of five years (similar to current APAs/ATRs), unless the specific facts and circumstances allow for an exception, in which case this term can be extended to ten years.

      To increase transparency, the Dutch tax authorities will publish an anonymised summary of each international tax ruling.


      References:

      http://data.consilium.europa.eu/doc/document/ST-5814-2018-REV-2/en/pdf https://esavjetovanja.gov.hr/ECon/MainScreen?entityId=10094 https://www.stibbe.com/en/news/2018/november/tax-alert-state-secretary-of-finance-announces-main-features-of-the-revised-dutch-tax-ruling-practi
      1. Advance tax rulings; in this text using the term "tax rulings" in the same meaning
      Back to Articles Back to Ksenija Cipek
    • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

Ksenija Cipek

Ksenija Cipek is based in Zagreb, Croatia and she is a lecturer at the local University of Law and a Member of European Law Institute. Ksenija has over 20 years experience working at the Ministry of Finance and the Tax Administration. She is a highly respected and recognised tax expert who has been heavily involved in lawmaking. Ksenija is also an author and books writer.

View profile

Follow Us

Maastricht University - 5th Global Tax Policy Conference: Tax Policy after BEPS, what can be expected? On 6 September 2019 at the Royal Museums of Arts and History in Brussels, Prof. Dr Hans van den Hurk, chairman of the Annual Global Tax Policy Conference of the Maastricht Centre for Taxation (Maastricht University) with his esteem speakers are addressing the above question.

Read more
Specialist writers View All
Copyright © 2012 - 2019 Offtax Ltd. All rights reserved. Compare Countries News & Articles About Join Us Directory Contact Us