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Why advance tax rulings are an effective tool for certainty
What you need to know:
- Tax rulings are formal legal opinions that a taxpayer or a class of taxpayers can obtain from the relevant Revenue Authority regarding a particular set of transactions or facts.
- Tanzania being one of the states that intend to have a user-friendly tax system has incorporated the mechanism for the application of advance tax rulings in the tax administration laws.
Taxes are as complex as life itself. While tax authorities face the challenge of collecting the proper amount of taxes, taxpayers would always measure the incentives and costs of complying with tax laws. In most cases, tax conflicts arise from different interpretations of tax statutes by different parties. The problem is aggravated by frequent changes in tax laws. One cannot neglect the problem of tax uncertainty given the magnitude and impacts of tax disputes.
Mature tax systems around the world have enshrined in their tax laws the advanced tax ruling system as a measure to reduce tax disputes that may arise from the interpretation of tax statutes. Tax rulings are formal legal opinions that a taxpayer or a class of taxpayers can obtain from the relevant Revenue Authority regarding a particular set of transactions or facts.
Tanzania being one of the states that intend to have a user-friendly tax system has incorporated the mechanism for the application of advance tax rulings in the tax administration laws.
In my experience, however, many taxpayers in Tanzania are not even aware this mechanism exists, let alone utilizing it. In this article, we will explore the brief tax ruling mechanism in Tanzania, its advantages, and the challenges facing taxpayers when trying to explore tax rulings in Tanzania.
The application process in Tanzania
An application for a tax ruling must be submitted to the Tanzania Revenue Authority (“TRA”) in writing, disclosing all material facts and relevant details of the envisaged transaction or circumstances. Upon submission to the TRA, the Commissioner General may request additional information before issuing a formal decision.
In case the information provided is sufficient, the TRA is required to issue the ruling in writing stating the TRA’s position about the matter in question.
However, that decision will be binding only on the taxpayer who made the application and only for the specific transaction or circumstance described in the application.
Why taxpayers should consider advance tax rulings
Upon successful application of tax rulings, the same has proven a useful tool for taxpayers in providing clarity and certainty to taxpayers regarding interpretations of certain provisions of the law and application of the same to their specific circumstances. In this case, taxpayers are allowed to make informed business decisions and plan their tax affairs accordingly.
The certainty helps taxpayers avoid unexpected tax decisions and penalties hence lowering the chances of disputes with tax authorities.
Improved tax planning can also be enhanced in the presence of aligned interpretations of certain provisions of tax laws.
By obtaining advance tax rulings, taxpayers can assess the tax implications of their transactions and plan accordingly. This can help them structure transactions in a tax-efficient manner hence reducing their overall tax liabilities. Efficient planning resulting from having advanced tax rulings can also result in reduced administrative costs as the taxpayers can avoid the need to go through the lengthy and costly process of defending their tax position in a tax dispute.
Double taxation risks can also be mitigated once a taxpayer obtains an advance tax ruling on cross-border transactions.
International tax principles and laws are complex and can vary widely in different tax jurisdictions. In scenarios where taxpayers are involved in cross-border transactions, advance tax rulings can help them navigate the complexities of international tax laws and ensure that they are complying with international tax laws in the relevant tax jurisdictions. In many cases, advanced tax rulings have proven efficient in guiding the allocation of taxing rights between different jurisdictions in case of cross-border transactions.
For years, in different tax jurisdictions, advance tax rulings have been a valuable tool for taxpayers’ mitigation of tax risks.
They provide clarity, certainty, and improved tax planning while reducing administrative costs. Nevertheless, the decision to seek an advance tax ruling is a complex one and will depend on the specific circumstances of each taxpayer.
Therefore, while taxpayers should consider seeking advance tax rulings to ensure compliance with tax laws and reduce the risk of unexpected tax costs, it is important for them to weigh the potential benefits and risks of obtaining a ruling, and to seek professional advice before making such a decision.
