AQQ v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judgment Date: 18 December 2012
• Date: 18 December 2012
• Docket Number: Income Tax Appeal No 1 of 2011
• Court: High Court (Singapore)

AQQ

Plaintiff

and

Comptroller of Income Tax

Defendant

[2012] SGHC 249

Andrew Ang J

Income Tax Appeal No 1 of 2011

High Court

Revenue Law—Income taxation—Additional assessments—Whether Comptroller had power to issue additional assessments—Section 74 (1) Income Tax Act (Cap 134, 2008 Rev Ed)—Revenue Law—Income taxation—Avoidance—Taxpayer buying subsidiaries by issuing convertible notes to branch of bank—Taxpayer paying interest under notes to branch of bank—Branch detaching interest coupon from notes and selling notes and paying most of interest received from taxpayer to another branch of bank—Branch selling notes and paying most of interest received to Malaysian company related to taxpayer—Malaysian company obtaining funds to buy notes through interest-free loans granted by two other related companies and sale of interest in several subsidiaries to taxpayer—Subsidiaries paying franked dividends to taxpayer—Taxpayer claiming deduction of interest expenses from dividend income and benefit of tax credits—Comptroller initially agreeing and issuing notices of assessments allowing taxpayer to claim tax refunds—Comptroller subsequently forming view taxpayer engaged in tax avoidance—Comptroller issuing notices of additional assessments disregarding dividend income and interest expenses—Whether arrangement constituted tax avoidance—Whether Comptroller entitled to disregard both dividend income and interest expenses—Sections 33, 33 (1), 33 (1) (c) and 33 (3) (b) Income Tax Act (Cap 134, 2008 Rev Ed)

The taxpayer company was incorporated as part of the restructuring exercise of a group of companies (‘the [B] group’) to reorganise its corporate structure in Singapore.

On 18 August 2003, the taxpayer acquired several subsidiary companies in Singapore (‘the subsidiaries’) by paying $75m each to [B], [C] and [D] for their interests in those companies. [B], [C] and [D] were all related companies under the [B] group.

In connection with the acquisition of the subsidiaries, the taxpayer entered into a financing arrangement (‘the Financing Arrangement’) with a bank (‘ [N Bank]’) following the bank's proposal contained in a discussion paper (‘ [N Bank]Discussion Paper’). The Financing Arrangement involved the following transactions which were all carried out on 18 August 2003. The taxpayer obtained the $225m to acquire the subsidiaries by issuing convertible notes to the Singapore branch of [N Bank] (‘ [N Bank Singapore]’). Under the notes, the taxpayer was required to pay interest at 8.85% per annum to [N Bank Singapore]. [N Bank Singapore] detached and retained the interest coupons (‘the Interest Coupons’) from the notes and sold the principal component of the notes (‘the Principal Notes’) to the Mauritius branch of N bank (‘ [N Bank Mauritius]’). Under a conditional payment obligation entered into with [N Bank Mauritius] (‘CPO 1’), [N Bank Singapore] promised to pay [N Bank Mauritius] interest at 8.845% per annum provided that [N Bank Singapore] received the full interest from the taxpayer under the Interest Coupons. [N Bank Mauritius] in turn sold the Principal Notes to [C], a Malaysian company. Under a conditional payment obligation entered into with [C] (‘CPO 2’), [N Bank Mauritius] promised to pay [C] interest at 8.84% per annum provided that [N Bank Mauritius] received the full interest from [N Bank Singapore] under CPO 1.

On the same day, [B] and [D] each granted [C] an interest-free loan of $75m in order to put [C] in funds to pay [N Bank Mauritius] for its purchase of the Principal Notes.

During the relevant years of assessment, the subsidiaries paid out franked dividends to the taxpayer. The dividends carried tax credits arising from tax deemed deducted at source which could be set off against tax payable on the taxpayer's chargeable income. During the same period, the taxpayer duly paid the interest due under the notes to [N Bank Singapore].

When tax for the relevant years of assessment came to be assessed, the taxpayer in its tax returns claimed the deduction of the interest expenses from the dividend income. It also claimed the benefit of the tax credits. The combined effect of claiming both was the precipitation of substantial tax refunds to the taxpayer.

The Comptroller initially accepted the taxpayer's tax computation and sent the taxpayer notices of assessment for years of assessment (‘YA’) 2004 to 2006 indicating that the taxpayer was to receive tax refunds (‘the original assessments’). Subsequently, the Comptroller formed the view that the taxpayer had engaged in a tax avoidance arrangement and invoked its powers under s 33 (1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’) by disregarding both the dividend income and the interest expenses and issuing notices of additional assessments (‘the additional assessments’) and a notice of assessment for YA 2007 (‘the notice of assessment for YA 2007’) which effectively recouped the tax refunds.

The taxpayer appealed against the Comptroller's decision to issue the additional assessments and the notice of assessment for YA 2007. The Income Tax Board of Review (‘the Board’) dismissed the appeal. The Board was of the view that the arrangement constituted tax avoidance under s 33 of the Act. The Board held, inter alia, that the Financing Arrangement was contrived and artificial or was structured in a contrived and artificial way in order for the taxpayer to obtain a refund of tax through the utilisation of tax credits and that it was also not carried out for bona fide commercial reasons but had, as one of its main purposes, the avoidance or reduction of tax. The Board also held that the Comptroller had the power under s 74 of the Act to issue the additional assessments.

The taxpayer appealed against the Board's decision. The taxpayer argued that, inter alia,the Board adopted the wrong approach towards interpreting and applying s 33, and, if the right approach was adopted and applied, the conclusion should be that the taxpayer did not engage in tax avoidance under s 33. The taxpayer also argued that the additional assessments were void because the Comptroller acted ultra vires its power under s 74.

Held, allowing the appeal:

(1) The proper approach towards applying s 33 of the Act was as follows: The Comptroller had to first determine whether the arrangement in question fell within any of the three limbs in s 33 (1). If the arrangement did not fall within any of the three limbs in s 33 (1), the Comptroller could not exercise his powers thereunder. If the arrangement did fall within any of the three limbs in s 33 (1), it had further to be determined whether either of the two statutory exceptions in s 33 (3) applied to the arrangement in question. If either of the statutory exceptions applied to the arrangement in question, the Comptroller could not exercise his powers under s 33 (1): at [64].

(2) It appeared that the Board adopted the wrong approach. The Board seemed to have conflated the statutory exception under s 33 (3) (b)with the elements of s 33 (1). The Board should not have delved straight into asking whether the Financing Arrangement was artificial and contrived before considering whether any of the three limbs in s 33 (1) was satisfied. This was not to say that it was altogether irrelevant to consider whether the Financing Arrangement was artificial or contrived, but merely that such consideration should have taken place only at the second stage when the question being considered was whether the statutory exception in s 33 (3) (b)applied: at [65].

(3) The predication principle as established in the Australian and New Zealand cases applied to s 33 (1) of the Act. Before the Comptroller might exercise his powers under s 33 (1), he had to be satisfied that the purpose or effect of the arrangement in question was one or more of the three consequences set out in sub-paras (a), (b) and (c)of s 33 (1). He reached this conclusion objectively through an examination of the terms of the arrangement and the manner in which it was implemented, without reference to the motives of the parties involved. To succeed, the Comptroller had to be able to predicate, by looking at the overt acts in the Financing Arrangement, that it was implemented in that particular way so as to achieve one or more of the three consequences set out in sub-paras (a), (b) and (c)of s 33 (1): at [69] and [76] to [78].

(4) The Comptroller was not wrong in determining that the Financing Arrangement fell within s 33 (1), at least where s 33 (1) (c) was concerned: at [81].

(5) Section 33 (1) (c) applied where the purpose or effect of the arrangement in question was ‘to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this Act’. These were words of wide import, applying even where there was no pre-existing liability to pay tax. Section 33 (1) (c) applied where an arrangement had the purpose or effect of reducing or avoiding any liability which was already accrued, yet to accrue, or would have accrued but for the arrangement: at [82] and [83].

(6) Pursuant to s 10 (1) (d), income tax was payable in respect of the dividend income received by the taxpayer, less allowable deductions and allowances (if any). Hence, there was relevant tax liability for the purposes of s 33 (1). It was only after tax had first been charged on the dividend income that s 46 (1) (a) enabled the taxpayer to set off the s 44 tax credits against the income tax payable on the dividend income: at [86].

(7) Section 33 (3) (b) of the Act should be interpreted as importing a subjective test which required an inquiry into the subjective reasons of the taxpayer for carrying out the arrangement in question: at [102].

(8) A taxpayer seeking to avail itself of the statutory exception under s 33 (3) (b)had to prove two elements. Firstly, it had to prove that the arrangement in question was carried out for bona fide commercial reasons. The...