Part 1 - AL-Tax

International Taxation Handbook6.2.3.4 APAs and binding rulingsSimilar to APAs are so-called binding rulings. A binding ruling can provide thetaxpayer with greater certainty and the tax administration with higher effectivenessof processing tax assessment and auditing than traditional tax measures mayachieve (Sawyer, 2004, p. 41). The binding ruling is normally designed to illustratethe tax consequences of a given transaction either before the associatedarrangement becomes unconditional, or at least before the tax return is filed anda tax position is taken concerning the arrangement.In some tax jurisdictions, the terms APA and binding ruling refer to the samepurpose of ex-ante ruling. In other tax jurisdictions, the term binding ruling isreferred to as an ex-post procedure to reach an agreement on controversial casefacts (hereafter referred to as Binding Ruling Type I), while the term APA is consideredexplicitly for ex-ante agreements.Germany, for instance, offers a slightly different type of binding ruling calledVerständigungsverfahren (hereafter referred to as Binding Ruling Type II) to settledisputes in the tax auditing process (Herzig, 1996; Hahn, 2001). The purpose ofthe classical Verständigungsverfahren is to resolve an ongoing auditing process fora taxpayer and, by doing so, should produce a common understanding betweenthe taxpayer and the tax authorities involved about the same (or similar) fact patternsin future years. While Binding Ruling Type I regularly covers tax caseswhich have been already started to be realized as business but have not yet beenassessed or audited, Binding Ruling Type II deals with cases which are under taxaudit. In Germany, Binding Ruling Type II is becoming increasingly important tohelp resolve transfer pricing controversies of the past and, by finding an agreementbetween relevant parties, to lay groundwork to avoid such controversies inthe future. On October 5, 2006, the Federal Ministry of Finance, Germany, issuedits administrative principles on advance pricing agreements which clarify the legalnature and procedural approach regarding advance mutual agreement procedures(and advance pricing agreements) in which Germany is involved.Romano (2002, p. 486) elaborates on some differences between binding rulingsand APAs: Legally, a binding ruling is a unilateral agreement, only affecting therespective tax administration and the taxpayer, while APAs can be unilateral, bilateral,or multilateral. Also, in general, binding rulings are a one-sided statement of thetax administration; The taxpayer can or cannot accept the ruling issued. In the case ofan APA, it is an agreement between both (all) parties where the taxpayer at leastapproves the content (de facto it is an agreement). In a binding ruling procedure, thetaxpayer may have a participating role in the initial phases of the process. Finally,124