Advance Tax Rulings in Perspective: A Theoretical and Comparative Analysis

Advance tax rulings are an increasingly common feature of mature income tax systems throughout the world. The Organisation for Economic Co-operation and Development’s (OECD’s) work demonstrates that there has been a trend from 1990 to 2013 among OECD member countries to adopt advance tax rulings regimes. The international expansion of advance tax rulings seems both intuitively desirable and salutary. Upon deeper reflection, both theoretically and empirically, however, there is a puzzle. Why are advance tax rulings regimes so popular? This article makes two contributions to our understanding of advance tax rulings. The first contribution is to highlight that the increased pervasiveness of advance tax rulings internationally is potentially puzzling in the light of Givati’s analysis, which suggests that the balance of strategic considerations facing taxpayers systematically disfavours taxpayers seeking advance tax rulings. Theory thus appears – at least as a preliminary matter – to be out of step with the observed rulings practices tracked by the OECD. We then consider how to resolve the puzzling popularity of advance tax rulings. We find the increased pervasiveness of advance tax rulings regimes should not be entirely surprising despite the apparent conflict with economic theory. To complement the arguments from theory, we offer some tentative evidence that advance tax rulings may not be of any consequence economically speaking. Empirical analyses of panel data of rulings practices published by the OECD do not show any reliable correlations of observed practice with social or economic fundamentals. This finding is consistent with the puzzle posed by economic theory, which suggests that rulings regimes are not likely to be particularly important in practice. This can arise in part due to the relatively slow process for issuing advance rulings compared to the timeframe facing taxpayers to make key business decisions. From an optimistic perspective, advance tax rulings are best regarded as serving an expressive function in support of the rule of law and sound tax administration. Less generously, a cynic might be tempted to say that the resolution to the puzzle posed by the incongruence between theory and practice may be that the best reason to have a binding rulings regime may be because just about everyone else has one.

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