Comptroller of Income Tax v AQQ and another appeal

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Comptroller of Income Tax v
AQQ and another appeal
Tax Bulletin
May 2014
Introduction
In Comptroller of Income Tax v AQQ and another appeal [2014] SGCA 15, the Court of
Appeal was required to rule on whether a financing arrangement fell foul of Singapore’s
statutory general anti-avoidance rules,1 and in a cross appeal, whether the Comptroller of
Income Tax (the Comptroller) had acted reasonably and fairly in exercising his powers
under those provisions to counteract the tax advantage that had been obtained. In a
decision handed down on 26 February 2014, the Court of Appeal agreed with the High
Court that the arrangement in question constituted tax avoidance, and only partially
allowed the Comptroller's appeal for one of the four years in dispute. This is a landmark
case as it is the first to deal with Singapore's statutory general anti-avoidance rules. It also
clarifies the scope of the Comptroller's powers and the principles that should be applied to
determine whether an arrangement constitutes tax avoidance.
Background
AQQ concerned a corporate restructuring – diagrams 1 and 2 illustrate the group
structure before and after the reorganisation – where external financing was taken. As a
result of the restructuring, interest deductions were claimed against dividends paid by
certain Singapore group companies (known as D, E, F and G) under the then prevailing
franking credit system.
This resulted in tax repayable of $13.6m for the Singapore holding company (i.e. AQQ).
Diagram 3 depicts the fund flows in relation to the financing arrangement entered into as
part of the group reorganisation.
Section 33 of the Income Tax Act reads “(1) Where the Comptroller is satisfied that the purpose or effect of any
arrangement is directly or indirectly —
(a) to alter the incidence of any tax which is payable by or which would otherwise have been payable by any
person;
(b) to relieve any person from any liability to pay tax or to make a return under this Act; or
(c) to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this
Act, the Comptroller may, without prejudice to such validity as it may have in any other respect or for any other
purpose, disregard or vary the arrangement and make such adjustments as he considers appropriate, including
the computation or recomputation of gains or profits, or the imposition of liability to tax, so as to counteract any
tax advantage obtained or obtainable by that person from or under that arrangement.
(2) In this section, “arrangement” means any scheme, trust, grant, covenant, agreement, disposition, transaction
and includes all steps by which it is carried into effect.
(3) This section shall not apply to —
(a) any arrangement made or entered into before 29th January 1988; or
(b) any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the
avoidance or reduction of tax.”
1
Diagram 1: Before reorganisation
Diagram 2: After reorganisation
Diagram 3: Funds flows
When the case was first heard at the Board of Review, it found the arrangement to be a tax
avoidance scheme within the meaning of section 33 of the Income Tax Act (the Act). The
taxpayer appealed to the High Court which held that the financing arrangement was a tax
avoidance scheme, but allowed the appeal on the grounds that the Comptroller did not
exercise his administrative powers fairly and reasonably in challenging the arrangement. The
taxpayer appealed to the Court of Appeal against the Judge’s holding that the financing
arrangement amounted to tax avoidance, and the Comptroller appealed against the Judge’s
holding that he had not acted reasonably and fairly in exercising his powers to counteract the
said arrangement.
Our June 2011 and January 2013 tax bulletins provide a summary of the facts of the case, as
well as the decisions of the Board of Review and High Court respectively.
Issues before the Court of Appeal
The Court of Appeal considered the following five issues:
1.
Were the threshold limbs of section 33(1) of the Act satisfied?
2. Was AQQ entitled to avail itself of the exception under section 33(3)(b) of the Act?
3. Was AQQ entitled to rely on specific provisions in the Act to preclude the application
of section 33?
4. Did the Comptroller exercise his powers under section 33 so as to counteract the tax
advantage obtained by AQQ?
5.
Had the Comptroller acted ultra vires in relation to section 74 of the Act by issuing the
additional assessments?
Were the threshold limbs of section 33(1) of the Act satisfied?
Before considering whether section 33(1) applied, the Courts first had to define “the
arrangement” in question. However, the approach taken by the Court of Appeal and the High
Court differed.
The High Court broke down the transaction into two arrangements – the corporate
restructuring, which it agreed had been undertaken for bona fide commercial reasons, and the
financing arrangement which it concluded had the purpose or effect of reducing or avoiding
any liability imposed. Accordingly, it applied section 33 only against the financing
arrangement.
The Court of Appeal, however, took the view that what amounted to an “arrangement” was a
question of fact which could be left to the Comptroller’s determination. It therefore accepted
that the arrangement was a composite scheme comprising both the corporate restructuring
and the financing arrangement.
Having defined the arrangement, the Courts went on to ascertain if the three limbs of section
33(1) had been satisfied. Applying the predication principle, the Court of Appeal agreed that
limb (c) had been satisfied as it could be objectively ascertained that the purpose or effect of
the transaction was to reduce or avoid the tax liability arising from the payment of the
dividends. The taxpayer’s argument that there was no tax liability because of the imputation
system was rejected by the Courts, as liability refers to legal liability to pay tax on dividend
income and not the cash flow effect after setting off imputation credits.
Was AQQ entitled to avail itself of the exception under section 33(3)(b) of the Act?
Having ascertained that the objective test under section 33(1) had been met, the Courts went
on to consider if the taxpayer was entitled to avail himself of the exception under section
33(3)(b). This necessitated a subjective enquiry into firstly, the taxpayer’s subjective
commercial motive for entering into the arrangement, and secondly, the subjective
consequences that the taxpayer wished to obtain.
The Court of Appeal agreed with the High Court that one of the taxpayer’s main subjective
purposes for entering into the arrangement was to obtain a tax benefit in the form of a
reduction of its tax liability through securing the refund of the tax credits in the section 44
accounts of the subsidiaries. However, it took a different approach from the High Court in that
it considered the composite arrangement as a whole instead of considering the corporate
restructuring and financing arrangement individually. Nonetheless, on the basis of the
testimony by the taxpayer that one of the objectives of the restructuring was to recover the “tax
assets” in the subsidiaries, the Court found that there was tax avoidance, as it involved a
conscious and elaborate plan to procure a particular and defined method of reducing AQQ’s
tax liability rather than being an incidental tax advantage that accrued as an ancillary benefit.
Interestingly, the Court of Appeal observed that this means similarly structured transactions
may be taxed differently depending on whether the taxpayer had set out to create a result
whereby his tax liability was avoided or reduced.
Was AQQ entitled to rely on specific provisions in the Act to preclude the application of
section 33?
The Courts also considered whether the operation of section 33 could be overridden by specific
sections of the Act that provided certain tax outcomes.
The Court of Appeal did not agree with the High Court that the statutory exception under
section 33(3)(b) was intended to be the sole safeguard against the potentially wide reach of
section 33(1), and was of the view “that recourse to the Australian and New Zealand
jurisprudence to develop adequate safeguards through purposive judicial interpretations was
expressly contemplated by Parliament.”2
Reviewing the Australian choice principle and the New Zealand scheme and purpose
approach, the Court held that the correct approach in the Singapore context is the latter. The
Court summarised the approach that ought to be adopted with respect to the interpretation of
section 33 as follows:
“(a) consider whether an arrangement prima facie falls within any of the three threshold limbs
of s33(1) such that the taxpayer has derived a tax advantage; and if so,
(b) consider whether the taxpayer may avail himself of the statutory exception under
s33(3)(b); and if not,
(c) ascertain whether the taxpayer has satisfied the court that the tax advantage obtained arose
from the use of a specific provision in the Act that was within the intended scope and
Parliament's contemplation and purpose, both as a matter of legal form and economic reality
within the context of the entire arrangement.” 3
The Court noted that B Group had made a public announcement even before the financing
arrangement was carried out that the issuance of the Notes was not intended to affect the
group’s consolidated borrowing position. In view of this, rather than considering AQQ’s
position alone, the Court held that the B Group as a whole did not incur any real economic cost
as a result of payment of the interest expenses. It could not therefore be said that the expenses
had been incurred for the purposes of section 14 (1)(a)(i) of the Act, and a deduction for the
expenses in this case could not have been within Parliament’s intention.
Did the Comptroller exercise his powers under section 33 so as to counteract the tax
advantage obtained by AQQ?
The Comptroller had sought to counteract the effect of the arrangement by disregarding it
entirely.
The High Court held that he had exercised his powers incorrectly as the corporate
restructuring was genuine, and only the financing arrangement ought to have been
disregarded.
The Court of Appeal disagreed, ruling that the standard of review when the Comptroller has
been given statutory discretion should be limited to whether he had acted in a fair and
reasonable manner. Although the court is entitled to strike down any adjustments made by the
Comptroller that are arbitrary or unreasonable, as well as any excessive or abusive exercise of
discretion, it does not warrant the courts deciding that a particular method of countering a tax
advantage is to be preferred where there are two or more such methods.
Interestingly, the Court was of the view that the Comptroller is justified in adopting any
method that is broadly appropriate to the object of counteracting the tax advantage, even if the
method adopted does not precisely match the particular elements of tax advantage with the
discrete steps of the arrangement that were deemed objectionable.
Because a different stance was taken on the Court’s role in policing the Comptroller’s exercise
of his discretion, the Court of Appeal disagreed with the lower court’s approach to
characterising (and counteracting) the tax advantage sought. The High Court had mentioned
that the Comptroller ought to have allowed a partial interest deduction and assessed AQQ for
2
3
Paragraph 95 of the judgment.
Paragraph 110 of the judgment.
interest withholding tax that was not borne by C as a result of the interposition of N Bank
Singapore and N Bank Mauritius. The Court of Appeal, however, allowed the Comptroller to
disregard the entire composite arrangement to negate the tax advantage (being the entire
interest deduction) obtained by AQQ. By doing so, the Comptroller could not recover interest
withholding tax as that was a benefit derived by C rather than the taxpayer (AQQ) against
whom section 33 was invoked.
Had the Comptroller acted ultra vires section 74 of the Act by issuing the Additional
Assessments?
The Court Appeal agreed with the High Court however, that the assessments issued by the
Comptroller for YAs 2004 to 2006 ought to be discharged, albeit for a different reason. The
High Court ruled that the Comptroller had acted ultra vires in respect of section 74 of the Act
in issuing the additional assessments for YAs 2004 to 2006. However, this was not material to
the outcome of the case, as the judge had already concluded that the assessments were void.
This was because the Comptroller had counteracted the effect of the arrangement incorrectly
by disregarding it entirely instead of merely disregarding the financing arrangement.
As mentioned earlier, the Court of Appeal did not take issue with the Comptroller’s
disregarding the entire arrangement. However, it held that the additional assessments issued
by the Comptroller for YAs 2004 to 2006 were nonetheless void as the tax assessed for those
years was less than the amount assessed in the original assessments for the respective years.
This is outside the scope of section 74. This was not the case, however, for YA 2007 and the
additional assessment for that year was held to be valid.
The Court also clarified that section 77(1) is concerned with formal or administrative defects in
Comptroller’s assessments, and cannot be used to validate what is void in law.
Interestingly, the Court went on to consider alternative causes of action that the Comptroller
could take in order to recover the tax refunded in YAs 2004 to 2006, going so far as to suggest
that the Comptroller could have exercised his discretion differently by imposing a tax liability
equivalent to the tax refunds.
The Court also considered whether it might be possible for the Comptroller to file a suit for tax
under section 89(1). This section allows the Comptroller to sue for “tax, interest and any
penalty imposed under this Act and any sum due to the Government under sections 44, 44A
and 45” by way of a specially endorsed writ of summons. However, the Court made a tentative
observation that the tax refunds might not readily be categorised as “tax, interest and any
penalty”.
It was also suggested that the Comptroller could institute an action at common law for unjust
enrichment to recover the tax refunds that as monies paid under a mistake.
Conclusion
As the first anti-avoidance case decided by the highest court in Singapore, the AQQ decision
provides a much-needed precedent to both taxpayers and the tax authorities on the ambit and
operation of section 33.
In arriving at its decision, the Court of Appeal laid down the boundaries of the Comptroller’s
discretionary powers in defining what an arrangement is for the purposes of section 33(1) and
the actions that can be taken to counteract the tax benefits derived under the arrangement.
In addition, in order for an arrangement to fall within the section 33(3)(b) statutory exception,
the taxpayer must now be able to prove that obtaining a tax advantage was not one of the main
reasons for entering into a transaction. In other words, any tax benefit should be incidental to,
as opposed to being the objective (or one of the key objectives) for, entering into a transaction.
Practically speaking, the tax implications of any well-planned and executed structure would
have been considered by a conscientious taxpayer, and the most tax efficient route adopted.
Therefore, except in the scenario in which all options available to the taxpayer yield the same
tax outcome, almost any structuring arrangement (or parts of it) could come within the ambit
of section 33(1). This is further complicated by the broad discretion given to the Comptroller to
“slice and dice” any arrangement as he sees fit.
The challenge facing taxpayers then is ensuring that the arrangement is able to fall within the
section 33(3)(b) statutory exception and prove an overriding commercial motive. In the light
of this decision, taxpayers will now have to take a much more comprehensive and holistic
approach towards planning and documenting transactions, for it is recognised that similarly
structured transactions may be taxed differently depending on what was the taxpayer’s intent.
In endorsing the scheme and purpose approach, the Courts also emphasised the importance of
the need to show that the reliance on a specific provision in the law must be within the
intention of Parliament, both as a matter of legal form and economic reality.
It is worth noting that the Goods and Services Tax (GST) and stamp duty legislation have
similar anti-avoidance provisions (section 47 of the GST Act and section 33A of the Stamp
Duties Act). While these are different types of taxes, the principles articulated in AQQ are
expected to be useful in interpreting similar provisions in the GST and stamp duty laws.
Hence, any arrangement that potentially reduces or avoids any GST or stamp duty liability,
including obtaining any refund of GST credits which would otherwise not been obtained, can
be considered anti-avoidance, unless similar statutory exception as embodied in section
33(3)(b) of the Income Tax Act applies.
In the light of AQQ, perhaps the question that taxpayers will need to ask themselves at each
step of the arrangement is “in the absence of the tax benefit, would I still do it the same way?”
Your PwC contacts
If you would like further advice or information in relation to the issues outlined in this
bulletin, please call your usual PwC contact or any of the individuals listed below:
Name
Email
Telephone
Alan Ross
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Sunil Agarwal
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Lim Hwee Seng
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Brad Slattery
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Corporate Tax Advisory Services
Financial Services
Global Structuring
Indirect Tax (Goods and Services Tax)
Koh Soo How
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