How do these new rules for advance tax rulings work? Chan Su Li explains.
The increasing complexity of business transactions often lead to a degree of uncertainty in the application of the relevant tax law and the tax outcome of these transactions. This ambiguity may result in the termination of a transaction if an adverse tax treatment renders it commercially unviable.
In an effort to provide greater clarity and certainty to taxpayers, the Prime Minister of Malaysia announced at the 2007 Budget that the Government would introduce a system of advance tax rulings. As a first step, a new Section 138B was inserted into the Income Tax Act 1967 (“ITA”) to enable the Director General ("Director General") of the Inland Revenue Board ("IRB") to make advance rulings. The detailed rules on advance rulings are contained in the Income Tax (Advance Ruling) Rules 2008 (“Rules”) which took effect retrospectively from 1 January 2007.
The implementation of the advance ruling system means that Malaysia has joined the ranks of countries such as Singapore, Canada and Australia, all of which have advance ruling systems.
FEATURES OF THE ADVANCE RULING SYSTEM
Scope of an advance ruling
An advance tax ruling is a written statement by the Director General on how any provision of the ITA would apply to (i) a specific taxpayer, and (ii) the proposed arrangement for which the ruling is sought. A taxpayer should seek an advance ruling where there are issues that arise as a result of an arrangement which require an interpretation of the tax laws as to how these issues are to be treated for tax purposes. Advance rulings enable the taxpayer to decide on a particular course of action and are issued for transactions that are seriously contemplated and are not of a hypothetical nature (Rule 2(3)).
Persons who may apply for an advance ruling
Rule 6(1) provides that an applicant may apply for an advance ruling in his own right or on behalf of a person who is yet to come into legal existence (i.e. a person who is not registered or allowed to act under any law). Rule 6(2) also permits an application to be made jointly by two or more persons.
Circumstances where an advance ruling shall not be issued
Rule 3 sets out 10 circumstances where an advance ruling will not be issued. These include the following:
(a) where at the time of the application for a ruling is made or at any time before the ruling is issued, the applicant has entered into or effected the arrangement for which the ruling is sought;
(b) where the application is frivolous, vexatious or based on hypothetical situations;
(c) where the Director General is of the opinion that the applicant has not provided sufficient information as requested by the Director General;
(d) where the application for the ruling requires the Director General to form an opinion as to a generally accepted accounting principle or as to a commercially acceptable practice; or
(e) where the matter on which the ruling is sought includes an advance pricing arrangement or a tax avoidance scheme.
Circumstances where an advance ruling is declined
The Director General may decline to make an advance ruling under Rule 4 in the following circumstances:
(a) where the application for the ruling requires the Director General to determine any question of fact;
(b) where the Director General considers that the correctness of the ruling would depend on the making of assumptions, whether in respect of future events or any other matter;
(c) where the matter on which a ruling is sought is subject to an appeal under Section 99 of the ITA, whether in relation to the applicant or any other person; or
(d) where there are outstanding debts by the applicant in respect of fees payable under Rule 17 for earlier advance ruling applications.
Form of application
An application for an advance ruling is to be made in the form determined by the Director General. The particulars set out in Rule 7(2) to be included in the application, namely:
(a) the identity of the applicant;
(b) a complete description of all relevant facts and documents relating to the arrangement for which the ruling is sought;
(c) a statement identifying the provisions of the ITA which are applicable to the ruling sought;
(d) the proposition of law, if any, which is relevant to the issues raised in the application;
(e) a statement whether a previous application has been made on the same or any similar arrangement by the applicant and the outcome of such an application; and
(f) any other particulars required by the Director General.
The Director General has the discretion under Rule 7(3) to waive any information set out in Rule 7(2) if he considers it unreasonable to require the applicant to provide such information.
Form and nature of an advance ruling
Rule 10 requires an advance ruling by the Director General to state the following:
(a) that it is an advance ruling made under Section 138B of the ITA;
(b) the identity of the applicant, the provision of the ITA and the arrangement as specified in the application to which the ruling applies;
(c) how the provisions of the ITA apply to the arrangement and to the applicant;
(d) the period or year of assessment for which the ruling applies;
(e) the material assumptions about future events or other matters made by the Director General; and
(f) the conditions, if any, stipulated by the Director General to which the ruling is subject.
Effect of an advance ruling
Where an advance ruling applies to any taxpayer in relation to an arrangement and the taxpayer applies the provision in the manner stated in the ruling, the IRB shall apply the provision in relation to the taxpayer and that arrangement in accordance with the ruling (Section 138B(4), ITA). An advance ruling is final and no appeal may be lodged against the ruling (Rule 16).
Taxpayers should be aware that the Director General has the discretion to withdraw, at any time, any advance ruling by giving a written notice to the person to whom the ruling applies (Section 138B(3), ITA and Rule 11). Under Rule 11(3), the date on which the withdrawal takes effect shall not be earlier than the date on which the person to whom the ruling applies can reasonably be expected to receive the withdrawal notice.
Further, where any provision in the ITA is repealed or amended, an advance ruling shall cease to apply to the extent that it is affected by that change in the law (Rule 13).
Fees for an advance ruling
The following fees are payable under Rule 17 in respect of an application for an advance ruling:
(a) a non-refundable application fee of RM500/-;
(b) a further fee, calculated at RM150/- per hour or part thereof, beyond the first 4 hours, spent by the Director General in considering the application; and
(c) reimbursement fees for external advice sought by the Director General (with the consent of the applicant) and other reasonable disbursements.
Before seeking a ruling, a taxpayer should bear in mind questions such as whether the proposed arrangement is fairly certain, whether the particular provision in the tax law is open to interpretation and whether the assumptions to be made and the risks involved in respect of the arrangement have been carefully considered and evaluated. An advance ruling may be either favourable or unfavourable to the interpretation desired by the taxpayer.
The advance ruling system is an addition to the income tax regime that should be welcomed and utilised by taxpayers. It will promote voluntary compliance by taxpayers and complement the existing self-assessment system. Advance rulings will also help to provide certainty as to the income tax implications of a proposed arrangement.
CHAN SU-LI (