Guidelines may foreshadow advance rulings in specific taxation cases

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The State Administration of Taxation (SAT) has issued the Working Guidelines on Rulings for Specific Tax Cases (Guo Shui Fa [2012] No. 14), which came into effect on 1 March.

Under Notice 14, an upper level tax bureau may give a ruling to a lower level tax bureau on the application of tax laws and regulations to a specific taxpayer on specific issues, generally upon the request of the lower level tax bureau. Rulings handed down under Notice 14 only apply to the specific taxpayer addressed in the ruling, and as such do not create a precedent for other taxpayers.

In most cases, the ruling procedure should be initiated by the local tax bureau directly handling the specific case. However, Notice 14 mentions situations where the applications are made by taxpayers directly.

In those circumstances, the cases should be referred to the local tax bureau directly handling the case to “investigate and verify” and “suggest the treatment”, before sending it back to the upper level tax bureau for a ruling. Notice 14, however, does not address whether taxpayers have the legal right to actually request a ruling, i.e. whether the local tax bureau has the obligation to initiate the ruling procedure upon the taxpayer’s application.

Some speculate that Notice 14 creates an advance/private ruling system in China.

In its most general form, an advance/private ruling system permits a taxpayer to seek a ruling from the tax authorities on the tax treatment of a specific transaction or structure before entering into that transaction or creating that structure. These advance/private ruling systems are common in the US and many other developed countries, but have not yet been established in China.

Although Notice 14 recognises that taxpayers may raise applications, most tax practitioners do not think it creates an advance/private ruling system in China because the local tax bureaus seem to retain discretion on whether to initiate the formal ruling procedure after “investigating and verifying” a case.

Instead, tax practitioners take the view that Notice 14 provides procedural clarification of the existing practice of upper level tax bureaus giving guidance to the lower level tax bureaus on the application of tax laws and regulations in a specific case.

In this view, the main purpose of Notice 14 is to regulate the internal relationships of the tax bureaus at different levels in the government, to ensure greater uniformity and to prevent a lower level tax bureau from making a decision outside the scope of its authority.

Although Notice 14 may not be interpreted to provide the legal basis for taxpayers to obtain advance/private rulings, the SAT is reported to be engaging in studies on the establishment of an advance/private ruling system in China.

Such a system would help taxpayers obtain more certainty on tax treatment before entering into a specific transaction or structure.

Business Law Digest is compiled with the assistance of Baker & McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Zhang Danian (Shanghai) at Baker & McKenzie by e-mail at: danian.zhang@bakermckenzie.com