Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment

Abstract

ABSTRACT:Politicians and tax practitioners often claim that tax uncertainty negatively affects investment. In many countries, firms can request fee-based Advance Tax Rulings (ATRs) to mitigate tax uncertainty. We analyze theoretically the circumstances under which investors request ATRs, how tax authorities should price them and how they can affect investment. We assume that tax authorities integrate investors' reasoning into their decisions. We determine the optimal fee tax authorities should charge. We find that in special cases this fee is prohibitively high, thus firms will refrain from requesting ATRs. However, we find that revenue-maximizing tax authorities offer ATRs if the ruling enables them either to significantly reduce their tax audit costs or to increase the probability of detecting ambiguous tax issues. Under certain circumstances, ATRs may effectively foster investment and potentially benefit both the tax authorities and taxpayers. Our results provide new explanations for why taxpayers that face high levels of tax uncertainty often do not request ATRs, even when the fee is rather low. Our results also hold when the tax authority maximizes social wealth instead of its revenues. Regulatory changes in ATR requirements might serve as a natural quasi-experiment for an empirical study of our predictions regarding investment decisions.

Deferred taxation under default risk

“…5 Despite this reform, other sources of uncertainty (such as default) have still been neglected. 6 Moreover, with a few exceptions (Sansing, 1998, Guenther and Sansing, 2000, Diller et al, 2017, tax experts have analyzed taxation in a deterministic context. In any case, default risk has been disregarded.…”

“…Assumption 1 A …rm's investment I yields an EBIT t ; that evolves according to a geometric Brownian motion (with 0 ), where is its deterministic growth rate, is the instantaneous standard deviation and dz t is the increment of a standard Wiener process. Moreover, growth rate cannot exceed the risk-free interest rate r. 10 Assumption 2 Depreciation and amortization (DA) is constant and equal to I with 2 (0; 1) : These resources are used to maintain asset I.…”

The Globar War: The EU’s Apple Tax Case

“…By allowing specially negotiated privileges to very powerful clever corporations, some states pervert a system that otherwise may be benefic: "Our results also hold when the tax authority maximizes social wealth instead of its revenues. Regulatory changes in ATR requirements might serve as a natural quasiexperiment for an empirical study of our predictions regarding investment decisions" (DILLER, et al 2016). The problem then become one of unfairness of the fiscal treatment due to your capacity of negotiating; many recent scandals tend to show that it is a huge one.…”

Does Capital Tax Uncertainty Delay Irreversible Risky Investment?

“…Unfortunately, these instruments are typically either not available, not feasible, too complicated, too imperfect in resolving uncertainty or too expensive (Givati 2009 andDe Simone, Sansing, andSeidman 2013). Moreover, recent research indicates that instruments such as advance tax rulings will often not be requested by taxpayers who are exposed to high tax uncertainty (Diller, Kortebusch, Schneider, and Sureth 2016). All this implies that capital tax assessments typically involve a signi…cant amount of tax risk that arises from the estimation procedures and from unpredictable outcomes of tax audits.…”

“…This is particularly important, as capital taxation in existing tax systems turns out not to be (perfectly) correlated with pro…t taxation. While the e¤ects of stochastic pro…t (or income) taxation at least to some extent have been investigated (Agliardi 2001, Niemann 2011, Diller, Kortebusch, Schneider, and Sureth 2016, the e¤ects of stochastic capital (or property) taxation…”