Tax Rulings (Pre-Ruling): Knowing the Tax Authority's Position in Advance

Category: Authorities & Reporting | Reading time: about 7 minutes

What a tax ruling is

Section 158B defines a "tax ruling" as a decision on anything concerning the applicant's tax liability, the tax result, or the effect on their tax liability — in respect of an action taken, or of income, profit, expense or loss they had. "Action" includes a transaction and a sale, and "profit" includes land appreciation.

The scope matters: the chapter is not limited to income tax. The "tax laws" for which a ruling may be sought include, among others, the Ordinance, the VAT Law, the Customs Ordinance, purchase tax, the Land Taxation Law and the Encouragement of Capital Investments Law.

Two kinds — and the difference is decisive

Section 158C(a) empowers the Director to give a tax ruling, and also a ruling by agreement. The difference is not technical:

• An agreed ruling — given by way of agreement with the applicant. It cannot be appealed. You received full certainty, and in exchange gave up the right to object;
• A non-agreed ruling — the Authority's position is stated, and it may be appealed as part of an objection or appeal against the assessment. Less certainty, but the door stays open.

Choosing between the two is the central strategic decision in the process, and it follows from one question: how confident are you in your position, and what is absolute certainty worth to you against preserving the right to argue.

The filing deadline — and the timing trap

Here lies one of the easiest points to fail on, because the rule is not uniform:

• For income tax — under section 158D(a), the request may be filed before or after the action is carried out — provided it is filed before the date for filing the return (under sections 132 or 133) in which the action, income, profit, expense or loss in question is taken into account;
• For VAT and land taxation — under section 158D(b), the request must be filed before the action is carried out. There is no retrospective route.

In practice: in a real-estate transaction or a VAT matter, the window closes the moment the transaction is executed. For income tax there is more flexibility — but it is bounded by the return-filing date.

What must be attached — and the disclosure duty

Section 158D(c) requires the request to include all material facts and particulars, with all documents, certificates, opinions, declarations, valuations and contracts attached — and where contracts have not yet been signed, their drafts — together with proof of payment of the fee. The Director may demand any further particular or document.

That disclosure duty is not a formality. Section 158F(a) provides that the Director may not retract a ruling he has given — unless he found that a required particular or document was not provided, that the circumstances changed, or that a false, erroneous or misleading particular was provided.

The conclusion is sharp: a ruling is worth exactly as much as the quality of the disclosure that preceded it. A material particular omitted — even in good faith — may render the whole ruling void at precisely the moment you need it.

Three powers of the Director worth knowing

1. He may refuse. Under section 158C(b), the Director may refuse to give a ruling, or determine that the answer will be given by the assessing officer other than by way of a ruling. He may also condition the ruling on joining another person as an applicant;
2. He may limit and condition. Under 158C(c), the ruling may be limited in time, subject to other limitations, or conditional;
3. He may publish. Under 158F(c), the Director may publish a summary of rulings he has given — even without the applicant's consent. The summary will not include the applicant's name or ID number, though in a small sector the transaction itself may be identifiable.

When it is genuinely worth it

A pre-ruling is not essential in every transaction, and it costs time, a fee and exposure. It justifies itself mainly where:

• The tax at stake is large relative to the cost and time of the process;
• There is no settled law or clear position on the issue, and two reasonable interpretations are possible;
• The transaction depends on certainty — an investor, buyer or bank that requires the tax outcome to be known before committing;
• It is a restructuring or a step that is very hard to unwind afterwards;
• An advance approval is required in any event — some provisions in the tax laws require a prior application, in which case the question is not whether but how.

Conversely, think carefully where the amount is small, where your position is strong and clear, or where the full disclosure required would expose information you would rather not present at this stage.

← Read our full guide: assessment hearings — how to prepare

This article is provided for general information only and does not constitute professional advice. Whether to apply, how to frame the request and which route to choose depend on the specific circumstances of each case.

Best regards,
Hager-Alperowitz & Co. — Certified Public Accountants