PROVIDING certainty to taxpayers is one of the cardinal principles of a good taxation system. Taxpayers do not want to be “left in limbo”. This is especially true when businesses are undertaking large transactions and the tax consequences could be substantial if there is a disagreement between the taxpayer and the Inland Revenue Board (IRB). Advance rulings provide taxpayers an avenue to avoid uncertainties.
Who and when can you apply?
All taxpayers can apply for advance rulings. The application for a ruling should be made before the transaction is undertaken. You cannot apply for the ruling once you have effected the transaction.
IRB will not entertain taxpayers seeking opinion on a future transaction. It requires evidence that the transaction for which you’re seeking a ruling is seriously contemplated. Once a ruling has been issued, it is binding on IRB and the taxpayer is expected to adopt the ruling. However, the taxpayer has the right to choose whether to go ahead with the transaction or not.
When will advance rulings not be given?
Advance rulings will not be given where the law is clear, or matters involving interpretation of foreign laws, or where the taxpayer seeking the opinion is under audit on a similar arrangement, or where the request is frivolous. Advance rulings will not be issued on matters involving transfer pricing, advance pricing arrangements, any tax avoidance schemes, accounting principles or commercially accepted practices, on the interpretation of the laws which have not been enacted, or issues centering around the question of facts.
What are the charges and procedures?
The application must be made through a prescribed form, but the substance of the application would include providing the relevant facts and the parties involved and highlighting the underlying issues relating to the application. It is also advisable to provide IRB with the tax position/rationale adopted by the applicant together with the commercial reasons for the arrangement.
There is an application fee of RM500. A further processing fee will be charged by IRB after the first 4 hours at the rate of RM150 an hour, and IRB will also seek a reimbursement on any other costs (with the consent of the applicant) incurred in processing the application.
The normal processing time is 60 days from the time the complete application is submitted. The director-general can withdraw the advance ruling on a prospective basis if the applicant does not comply with the conditions imposed by the IRB or the facts provided at the time of the application differs from the actual transaction.
If the taxpayer disagrees with the ruling and goes ahead with the transaction, the taxpayer has the right to appeal against the tax treatment through the normal appeal procedures.
What is happening in the ground level?
Generally advance rulings are not being extensively used by taxpayers. Why? It could be due to the onerous conditions stated in the regulations and guidelines. For example, the transaction must be seriously contemplated is a big impediment because businesses cannot assure IRB that the transaction will be undertaken. Another problem is there is a possible contradiction where IRB discourages taxpayers from seeking an opinion on a transaction, while taxpayers’ intention is to seek an alignment of their tax position with IRB, which is tantamount to seeking an opinion from IRB.
There may also be a misunderstanding among taxpayers that rulings issued by IRB tends to sway in favour of IRB rather than the taxpayer.
In the current climate where IRB is pushing towards greater compliance rather than enforcement, the use of advance rulings should be promoted actively, and the conditions should be relaxed to provide sustainable tax revenues.
This article is contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai (www.thannees.com).