Advance Rulings

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(Extracted from 2012 Budget Commentary And Tax Information)

1. Introduction
 
With effect from 1 January 2007, a person may apply for an advance ruling from the Director General of Inland Revenue (DGIR) on how the provisions of the Income Tax Act 1967 (ITA 1967) would apply to the person and to the arrangement for which the advance ruling is sought. This service was introduced with insertion of S. 138B to the ITA 1967 while specific provisions were gazetted in the Income Tax (Advance Ruling) Rules 2008. Guidelines on Advance Rulings were also issued to provide further clarifications on the scope, procedures and fees imposed.
2. Objective
 
An advance ruling aims to ensure clarity and consistency of tax treatment since it is a written statement by the DGIR on the interpretation and application of income tax provisions to a person or arrangement, which is not clearly stated or provided for in the ITA 1967. As an advance ruling is only issued for a proposed arrangement that is seriously contemplated, it would minimise tax disputes as prior confirmation is obtained from the DGIR on the tax treatment in question.
3. Scope of advance ruling
  The DGIR is not permitted to make an advance ruling that authorises or requires the Minister of
Finance or the DGIR to:
  • impose or remit a penalty;
  • remit any tax due and payable;
  • approve any application under the ITA 1967;
  • inquire into the correctness of any return or other information supplied by any person;
  • prosecute any person; or
  • recover any debt owing by any person.
  Similarly, an advance ruling shall not be made under the following circumstances:
  • the application for advance ruling is frivolous, vexatious or for hypothetical situations;
  • the arrangement for which the advance ruling is sought has been entered into or effected prior to the ruling being issued;
  • the subject matter of the ruling requires interpretation of foreign law or is being dealt with or should be dealt with by the competent authorities;
  • an advance ruling which applies to the subject matter already exists for the period or year of assessment concerned and had been issued earlier to the same person;
  • an audit or investigation is being carried out by the DGIR on the subject matter for which the ruling is sought whether in relation to the applicant or any other person;
  • insufficient information was furnished by the applicant;
  • where an opinion is required from the DGIR with respect to generally accepted accounting principles or commercially accepted practices;
  • the subject matter of the ruling involves an advance pricing arrangement or a tax avoidance scheme;
  • the ruling sought involves an interpretation of a provision in the ITA 1967, rules or regulations that have not been enacted; or
  • in the opinion of the DGIR, it would be unreasonable to make the ruling with the resources available.
  The DGIR may also decline to make an advance ruling if:
  • the matter on which the ruling is requested is purely a question of fact;
  • the correctness of the ruling would depend on assumptions made in respect of a future event or any matter;
  • the subject matter of the ruling is currently under appeal pursuant to S. 99 of the ITA 1967 whether in relation to the applicant or any other person; or
  • the applicant has outstanding debts in respect of fees payable for earlier advance ruling applications.
Where an application for advance ruling is declined, the DGIR shall notify the applicant in writing of his decision and reasons thereof.
4. Application and notification procedures
  A person may apply for an advance ruling in his own right or on behalf of a person who is not registered yet. Two or more persons may also jointly apply for an advance ruling on how the provisions of ITA 1967 would apply to each person in respect of the same arrangement.
The application must be made in a prescribed form [Borang KA(1/2007)], by furnishing the information and documents requested therein together with a non-refundable application fee of RM500. The form can be obtained from the Technical Department of the Inland Revenue Board or be downloaded from its website. Further fees at the rate of RM150 per hour after the first 4 hours of processing time, may also be payable if additional time or cost were incurred by the DGIR for the ruling. The advance ruling will only be issued to the applicant after all fees payable are paid.
A withdrawal may be made by the applicant at any time before the ruling is issued by forwarding a notice in writing to the DGIR. A person who withdraws his application for an advance ruling is still liable to pay all fees incurred up to the time of receipt of the letter of withdrawal by the DGIR. Otherwise, the advance ruling would be issued within 60 days from the date a complete application is submitted and an application for an extension of the period or year of assessment to which the ruling applies can be made within 3 months prior to the end of the period or year of assessment stated in the advance ruling or any other period approved by the DGIR.
In making the advance ruling, the DGIR may at any time request for further information, carry out onsite inspection and make assumptions as he considers most appropriate. The DGIR can decline to make an advance ruling where insufficient information is provided by the applicant. All information in an advance ruling is treated as confidential and will not to be published in public in any form.
5. Form and nature of an advance ruling
  The advance ruling made by the DGIR shall state that the ruling is made pursuant to S. 138B of the
ITA 1967 and it shall include the following:
    • the identity of the person, the provisions of the ITA 1967 and the arrangement specified in the application to which the advance ruling applies;
    • how the provisions of the ITA 1967 would apply to the arrangement and to the person to which the advance ruling applies;
    • the period or year of assessment for which the ruling applies;
    • material assumptions made by the DGIR about future events or other matters; and
    • the conditions to which the advance ruling is subject to, if any.
  A person who has obtained an advance ruling is required to disclose the following information in the
preparation of his relevant annual tax return:
  • the existence of an advance ruling;
  • whether or not he has complied with the advance ruling; and
  • whether there are any material changes made to the arrangement identified in the advance ruling.
6. Withdrawal and cessation of an advance ruling
 
The DGIR may at any time, withdraw an advance ruling after its issuance. A notification of withdrawal would be issued to the person to whom the ruling applies but the date of withdrawal shall not be retrospective. A person who has effected the arrangement before the withdrawal date would be allowed to apply the advance ruling issued to him until the period stated in the ruling ends. However, the advance ruling would not be applicable if the arrangement is effected after the date of withdrawal.
An advance ruling made would be binding on the DGIR and the person concerned in relation to the arrangement for the period or year of assessment as specified in the ruling, notwithstanding any other provision of the ITA 1967. If the arrangement is not effected within the specified period or year of assessment, the ruling will automatically lapse and should not be taken as a precedent for other cases.
The advance ruling is final and no appeal can be lodged regardless of its outcome. If the proposed arrangement is effected, the advance ruling has to be complied with and any objection has to be appealed under S. 99 of the ITA 1967 that is against the notice of assessment. The exceptions below are provided under S. 138B of the ITA 1967 where an advance ruling would not be binding on the DGIR:
  • the arrangement carried out by the person is materially different from the arrangement stated in the ruling;
  • there was a material omission or misrepresentation in, or in connection with the application of the ruling;
  • the DGIR made an assumption about a future event or another matter that is material to the ruling and that assumption proves to be incorrect subsequently; or
  • the person fails to satisfy any of the conditions stipulated by the DGIR in the advance ruling.
The advance ruling would also cease to apply if the provision of the ITA 1967 which is the subject of the ruling is repealed or amended such that it alters the way in which the tax law applies. The cessation date of the advance ruling is from the date the repeal or amendment is effective. Any typographical or minor errors would not affect or render a ruling void if the errors do not alter the application of the ITA 1967 in the ruling.
The advance ruling would also cease to apply if the provision of the ITA 1967 which is the subject of the ruling is repealed or amended such that it alters the way in which the tax law applies. The cessation date of the advance ruling is from the date the repeal or amendment is effective. Any typographical or minor errors would not affect or render a ruling void if the errors do not alter the application of the ITA 1967 in the ruling.

(Extracted from 2012 Budget Commentary And Tax Information)


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