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

52 Pages Posted: 31 May 2014 Last revised: 21 Mar 2016

See all articles by Markus Diller

Markus Diller

University of Passau

Pia Kortebusch

University of Paderborn

Georg Thomas Schneider

University of Graz

Caren Sureth-Sloane

University of Paderborn; Vienna University of Economics and Business

Date Written: 2014

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 find that it is often optimal for tax authorities to charge prohibitively high fees to discourage firms from requesting an ATR. 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.

Keywords: Advance Tax Rulings, Fee Design, Investment Effects, Tax Uncertainty

JEL Classification: H21, H25, M41, M42, M48

Suggested Citation

Diller, Markus and Kortebusch, Pia and Schneider, Georg Thomas and Sureth-Sloane, Caren, Boon or Bane? Advance Tax Rulings as a Measure to Mitigate Tax Uncertainty and Foster Investment (2014). WU International Taxation Research Paper Series No. 2014-06. Available at SSRN: https://ssrn.com/abstract=2442749 or http://dx.doi.org/10.2139/ssrn.2442749

Markus Diller

University of Passau ( email )

Innstrasse 27
Passau, 94032
Germany

Pia Kortebusch

University of Paderborn ( email )

Warburger Str. 100
Paderborn, D-33098
Germany

Georg Thomas Schneider

University of Graz ( email )

Austria

Caren Sureth-Sloane (Contact Author)

University of Paderborn ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

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