Cooperation with the tax authority - advance ruling vs written explanation By Villy Lopman
Tax Counsel at Law office Raidla Lejins & Norcous

The tax authority is responsible for collecting taxes and punishing the wrongdoers. According to common knowledge the state’s function is not be the counselor or the educator of the taxpayer, except when increasing taxpayers’ knowledge of taxes in the course of fiscal control and by issuing notices of assessment.

Actually the functions of Estonian tax authority are far broader than that. Pursuant to tax laws, a person is entitled to demand that the tax authority explains tax laws, gives advice and issues advance rulings. In other words - it is possible for the taxpayer to obtain information from the state already before entering into a transaction or performing an act.

Therefore, it is possible for a taxpayer to get explanations in respect of tax laws also prospectively and not just retrospectively, when reading the notice of assessment after a tax audit.

Advance ruling vs written explanation

Under Estonian tax law it is possible for a taxpayer to obtain an opinion from the tax authority in two ways:

a) by filing a request for explanation;
b) by requesting an advance ruling.

Subject to the fulfillment of certain conditions, a written explanation may also be binding upon the tax authority. An advance ruling, on the other hand, is always binding save for cases when exceptional circumstances are present as a result of which the advance ruling is not deemed to be binding. A request for explanation may be filed free of charge, whereas upon filing a request for an advance ruling, one has to pay a state fee in the amount of EUR 191.73 in the case of a natural person and in the amount of EUR 766.93 in the case of a legal person. The aforesaid may leave an impression that all differences which are important in practice have already been indicated in the present section and hence the topic has been covered. Nevertheless, such a conclusion would be somewhat too premature.

Which option to choose?

Requesting an advance ruling is reasonable in cases where the time is the secondary consideration. The advance ruling is to be issued by the tax authority within 60 days. Nevertheless, in certain cases this term may be extended by additional 30 days. The current practice is that a person obtains the advance ruling at the end of the said 60-day term and the extension of the term by another 30 days occurs rarely.

The tax authority is obliged to respond to a request for explanation within 30 days and in case of more complex questions the term may be extended by another 30 days. In practice, it takes around 30 days to obtain the respective response; in case of simpler questions the response may also be obtained substantially earlier.

An advance ruling is given with respect to an act or a set of acts to be performed in the future. Therefore, it is not possible to request an advance ruling once the transaction has already been entered into (e.g., an agreement has been signed) or a substantial proportion of the acts have already been performed (e.g., the merchandise has already left the state).

In conclusion, it could be said that although an advance ruling and a written explanation are in principle meant to solve the same problem – clarifying the tax consequences of certain transactions and acts – their field of use is in some sense different. The advantage of the request for explanation has an operative nature and the wider field of use. The drawback of requests for explanation is the lack of clarity as to whether they are binding. The undisputable advantage of advance rulings is the fact that they are explicitly binding pursuant to law. However, upon filing a request for an advance ruling, one should take account of certain limitations, the amount of state fee to be incurred and the fact that the receipt of response usually takes twice as long as in case of a request for explanation. On the other hand, in case of an advance ruling, the tax authority is able to analyze the issue within a longer period of time and therefore the response is substantially more thorough.

	Advance ruling	Written explanation
Expenses	EUR 191.73 / EUR 766.93	0
Term (in days)	60+30, in practice 60	30+30, in practice 30 or less
Acts to be carried out in the future	+	+
Acts that have already been carried out	-	+
Transfer prices	-	Arguable
Optimization of taxes	-	+
Tentative transactions	-	+
Simple questions	-	+
Complex questions	+	+
Legally binding nature	+	Arguable, depends on the circumstances

Fact Sheet

Advance rulings have been issued as of 1 January 2008

59 advance rulings have been issued since 2008.

53 advance rulings have been issued to legal persons.

13 advance rulings have been issued to non-residents.

6 advance rulings have been issued to natural persons.

In 62% of the cases the Tax and Customs Board agrees with the taxpayer.

15 advance rulings have been issued in respect of the Value Added Tax Act.

44 advance rulings have been issued in respect of the Income Tax Act.

Villy Lopman
Tax Counsel
Law office Raidla Lejins & Norcous Print this article

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