Reasons to obtain advance tax rulings
In Israel, it has long been standard practice to obtain advance tax rulings before completing a big deal – they are sometimes referred to as ‘‘pre-rulings.‘‘ The aim is to reduce uncertainty, avoid double taxation and/or avoid taxation on ‘‘paper gains‘‘ such as share-for-share transactions or employee options. In the years 2006-2009, the Tax Authority says over 3,400 ruling applications were filed.
Rulings may be partly factual, partly interpretative of the law, but always within the confines of the law – the old British custom of ‘‘extra-statutory concessions‘‘ are precluded by Section 245 of the Income Tax Ordinance.
The tax law lays down formal procedural rules regarding rulings.
Taxpayers may apply to the Director of the ITA for a ruling regarding the liability to tax, the tax result or any consequence thereof with regard to an act performed or income, profit, expenditure or loss that the taxpayer incurred.
Recently, the tax ruling pace has slowed down. In the past, it is claimed that over-generous rulings were issued and certain legal proceedings have now been initiated. These proceeding have not yet run their course. Consequently, in practice, tax officials are keen to check the probity of any proposed ruling before it is issued.
Speeding up the process of obtaining rulings.
On January 13, 2010, the Israeli Tax Authority announced the commencement of a ‘‘green channel‘‘ for certain tax rulings. This is a fast track procedure regarding recurring ruling requests for which a framework and criteria can be prescribed, enabling rulings to be issued based on the declarations and undertakings of the applicants.
In practice, this involves filling out a form which covers: the applicant‘s details, the facts, the request, the tax arrangement and its conditions, and declaration and undertakings of the applicant.
So far, green channel ruling forms have been issued as follows:
– Form 903: Merger of taxable mutual funds
– Form 904: Merger of exempt mutual funds
– Form 905: Determining the original price and acquisition date upon receipt of an overseas asset – Step up (we discussed this form recently in this column)
– Form 906: Grant of restricted stock units (RSU)
– Form 907: Weighted discount rate calculation
The ITA‘s announcement of the green channel states that the rulings are not issued automatically. The application should be submitted to the ITA‘s Professional Division, which will seek to issue a positive decision regarding the proposed tax arrangement within a short time period, which is not defined.
Rules for Tax Rulings
According to the Tax Law, a tax ruling application must be submitted before the due date for filing the annual income tax return concerned (or before the execution of a transaction in real estate and VAT cases.
The application must contain relevant material details, documents, confirmations, opinions obtained, declarations, valuations, agreements or draft agreements if no final agreements have been signed.
There are generally no time limits for issuing a ruling. Ruling conditions or ruling time limits may be stipulated. The Tax Director may issue or refuse to issue a ruling or refer the matter to an assessing officer for a reply.
The applicant must be given a reasonable opportunity to be heard. The ruling cannot be appealed but the existing objection process can be applied to any ensuing assessment.
Note that an application may not be withdrawn without the Tax Director‘s permission. The application may be anonymous but the ruling will only be issued after the applicant is identified.
Any ruling binds the Tax Director unless the information or documents submitted were incomplete false or ‘‘if the circumstances relating to the ruling have changed.‘‘ If the ruling was issued by agreement, the applicant is also bound by the ruling, unless the act concerned was not carried out.
The ITA director may charge a fee but usually does not at present, except in certain M&A cases.
Advance Rulings for Transfer Pricing Agreements
Any party to an international transaction between related parties (defined very broadly) may apply to the ITA Director for an Advance Pricing Agreement (APA) confirming that the price of the transaction or a series of similar transactions is on market terms.
The APA application must be accompanied by all material facts and details of the transaction(s), the method for determining the price, as well as any relevant documents, confirmations, opinions, declarations, valuations, transaction agreement or draft agreement, and any other documents or details requested by the director.
Timeframes for Advance Pricing Agreement Rulings
Unlike other tax rulings, the ITA Director must issue his APA ruling and grounds within 120 days after receiving all the above documents, but within this period he may notify an extension of the period, for reasons that will be recorded, up to 180 days. If the Tax Director does not respond within this period, the taxpayer‘s application is deemed to be confirmed.
APAs may be applied to any international related party transaction, including transactions involving intellectual property. APAs may be unilateral or bilateral – the latter usually being pursuant to a tax treaty. Bilateral APAs are expected to relate in large part to transactions involving intangibles since these form a significant part of Israel‘s international trade.
Are Rulings Published?
The ITA is permitted to publish tax rulings in anonymous form and does so -its website.
Can other taxpayers get better rulings?
A District Court case (Income Tax Appeal 589/04 – Ariela & Moshe Shahar v. Hadera Assessing Officer) ruled that the ITA must avoid inequality. The case dealt with stock options of a well known company.
The Judge ruled that an executive body such as the ITA cannot reach an arrangement that discriminates between different taxpayers in similar circumstances and prevent the arrangement being applied to the one of them. Furthermore, such arrangements should not be signed and concealed.
As always, consult experienced tax advisors in each country at an early stage in specific cases.
The writer is an international tax specialist at Harris Consulting & Tax Ltd.