4.20 Use and Misuse of Rulings

Primary Reference to Article 12 – Rulings and Interpretations

Rulings serve a useful and valuable function in the tax system if used properly, and a focal point for abuse if not.

In our view, the proper use of rulings is to bring certainty. Most commonly this will arise in two areas; where the law may be unclear and prone to multiple interpretations, and when an early resolution of a matter is needed. In the first case, large transactions, because of the risk of an adverse outcome, may be submitted for a ruling to provide certainty as far as possible. In the second case, it may be prudent or required to obtain a tax clearance, so that the tax liability can be determined with certainty. The situation of distribution from an estate, for example, could be a candidate for a ruling because the trustee might be liable for tax of the estate if the assets later prove insufficient to pay such tax because of the distribution.

But there are many instances where a ruling is not appropriate and we mention three of these. The first is where the ruling function serves as a stop-gap to fill in details not in legislation. This amounts to levying tax by administrative practice not by law. It violates several principles of our Taxpayer Charter such as certainty, and integrity. The second is where discretion is given to a rulings officer to approve an incentive, tax reduction, or tax structure (e.g. a conduit arrangement) based on subjective criteria which are fluid. The third is where a ruling is needed to obtain a particular tax result and the ruling really serves as either a notification or an advance audit. One example is a step-up in the basis of assets to fair market value granted to an individual on becoming resident but only via a ruling. Either the individual qualifies or does not, and what is gained by a ruling?

It is noted that certain countries for historic reasons have embraced this rulings type system, perhaps derived from notarial traditions. As far as possible we suggest limiting the need for rulings in favour of comprehensive and clearly drafted legislation. The resources are best devoted to other uses.