New Rules on Advance Rulings - Shearn Delamore

N E W S L E T T E RVOL 7 NO 2.0 JUNE 2008KDN NO. PP 12544/10/2008T A X L A W<strong>New</strong> <strong>Rules</strong> on Advance RulingsIN THIS ARTICLE, FOONG PUI CHI DISCUSSES THE NEWLY INTRODUCED INCOME TAX (ADVANCERULINGS) RULES 2009.IntroductionAn Advance Ruling (“AR”) is a written statement issued by the Director General of Inland Revenue(“DGIR”) in response to an application made by any person, setting out his interpretation of how anyexisting provision of the Income Tax Act 1967 (“ITA”) applies or would apply to a “seriouslycontemplated arrangement”. The concept of AR, widely known in various other jurisdictions as “privateruling”, was introduced in Malaysia by the insertion of a new Section 138B 1 in the ITA in 2007.However, the rules relating to the procedure and scope of AR in Malaysia, were only gazetted in 2008as the Income Tax (Advance Ruling) <strong>Rules</strong> 2008 2 (“AR <strong>Rules</strong>”) and subsequently Guidelines OnAdvance Rulings were issued by the Inland Revenue Board in February 2008.Scope of Advance RulingOn an application by a person, the DGIR shall make an AR on how a provision of the ITA applies tothat person and the arrangement referred to. However, the DGIR should not make an AR thatauthorises or requires, amongst other things,• the imposition or remittance of a penalty;• remittance of any tax due and payable;• prosecution of any person; or• an inquiry into the correctness of any tax return.The AR <strong>Rules</strong> further provide that the DGIR shall not make an AR in certain circumstances, including:• where the applicant has entered into or carried out the arrangement at the time theapplication is made or before the AR is issued;• where the application for AR is frivolous, vexatious or based on hypothetical situations;• where the matter on which the AR is sought involves an interpretation of foreign law, anadvance pricing arrangement or a tax avoidance scheme;• where the applicant has not provided sufficient information as requested by the DGIR; and• where the application would require the DGIR to form an opinion as to a generally acceptedaccounting principle or a commercially acceptable practice.In addition, the DGIR may also decline to make an AR where:• the application for AR would require the DGIR to determine any question of fact or makecertain assumptions;• the applicant has outstanding debts in respect of fees payable for earlier AR applications; or

• the matter on which the AR is sought is subject to an appeal before the SpecialCommissioners of Income Tax.Procedure for Application of Advance RulingAn application for AR has to be made in Borang KA [1/2007] and the AR <strong>Rules</strong> do not only allow aperson to apply for an AR in his own right or jointly with others, but also allow an application to bemade on behalf of a person who is yet to come into legal existence, such as a company which is yet tobe incorporated.When making the application, the applicant may be required to submit, amongst others, thefollowing particulars:• the identity of the applicant;• a complete description of all relevant facts and documents relating to the arrangement inrespect of which the AR is sought;• a statement identifying the relevant ITA provisions in respect of which the AR is sought;• the proposition of law (if any) which is relevant to the issues raised in the application;• a statement whether a previous application has been made on the same or any similararrangement by the applicant and the result of any such application; and• any other particulars as may be required by the DGIR.Where necessary, the DGIR may also request for further information from the applicant or makecertain assumptions if such information could not be obtained.Fees for Advance RulingEvery AR application must be accompanied with a non-refundable application fee of RM500. Overand above that, a further fee of RM150 per hour (or part thereof) beyond the first 4 hours would becharged for the time spent by the DGIR to consider the application and the applicant would also berequired to reimburse the DGIR for any fees incurred by the DGIR for obtaining external advice as wellas any other costs and reasonable disbursements incurred by the DGIR in relation to the AR.Finality & Binding Nature of Advance RulingWhen an AR has been issued to the applicant, it shall be final and no appeal shall be lodged against it.This means that it shall be binding upon the DGIR subject to any qualifications specified in the AR andalso upon the applicant in respect of the particular arrangement and time period as specified in theruling, unless:• the arrangement carried out by the applicant is materially different from the arrangementstated in the AR;• there was a material omission or misrepresentation in, or in connection with, the applicationfor the AR;• the assumption made by the DGIR about a future event or another material eventsubsequently proves to be incorrect; or• the conditions stipulated in the AR are not satisfied by the applicant 3 .With the issuance of an AR, the DGIR will apply the AR to the person and arrangement in accordancewith the AR, provided the person to whom the ruling applies also applies the ITA provision in themanner stated in the ruling 4 . However, an AR shall cease to apply if the ITA provision in respect ofwhich the AR was sought has been repealed or amended and the DGIR may also, at any time,withdraw an AR 5 , with the withdrawal to take effect as specified in the notice of withdrawal but notearlier than the date such notice is reasonably expected to be received.<strong>New</strong> <strong>Rules</strong> on Advance Rulings 2

ConclusionThough it may be too early to assess the viability of the Malaysian AR system, a potential shortcomingwhen compared with the other AR systems is the lack of an avenue for appeal (where no assessmenthas been or will be raised) in the event the applicant disagrees with the interpretation of the DGIR.Unlike the Australian system, the AR <strong>Rules</strong> also fails to address situations where an AR is inconsistentwith a Public Ruling 6 or where the law turns out to be more favourable to the applicant.As such, whilst the AR system is aimed to promote tax certainty and compliance and to minimisedisputes between the DGIR and taxpayers, it is left to be seen whether such objectives could beachieved in practice.FOONG PUI CHITAX & REVENUE PRACTICE GROUPFor further information on concerning the Income Tax (Advance Ruling) <strong>Rules</strong> 2009, pleasecontactGoh Ka Imkgoh@shearndelamore.comAnand Rajanand@shearndelamore.com1Section 138B of the ITA came into operation on 1 January 2007.2The Income Tax (Advance Ruling) <strong>Rules</strong> 2008 [P.U. (A) 41/2008] shall be deemed to come into operation on 1 January 2007.3See Section 138B(6) of the ITA.4See Section 138B(4) of the ITA.5See Section 138B(3) of the ITA.6A Public Ruling is issued for the purpose of providing guidance to the public and officers of the Inland Revenue Board ofMalaysia, setting out the interpretation of the DGIR as to how any existing provision of the ITA applies or would apply to anyperson or class of persons, or any type of arrangement. See Section 138A of the ITA.<strong>New</strong> <strong>Rules</strong> on Advance Rulings 3