AQQ v Comptroller of Income Tax

• Jurisdiction: Singapore
• Judge: Andrew Ang J
• Judgment Date: 18 December 2012
• Neutral Citation: [2012] SGHC 249
• Court: High Court (Singapore)
• Docket Number: Income Tax Appeal No 1 of 2011
• Year: 2012
• Published date: 21 February 2013
• Hearing Date: 26 March 2012,27 March 2012
• Plaintiff Counsel: Davinder Singh SC, Ong Sim Ho, Loh Hsiu Lien, Ong Ken Loon and Khoo Puay Pin Joanne (Drew & Napier LLC)
• Defendant Counsel: Liu Hern Kuan and Joanna Yap Hui Min(Inland Revenue Authority of Singapore)
• Subject Matter: Revenue Law,Income taxation,Avoidance,Section 33, Income Tax Act (Cap 134, 2008 Rev Ed
• Citation: [2012] SGHC 249

Andrew Ang J: Introduction

This appeal raises important issues pertaining to the proper interpretation and application of anti-avoidance provisions in s 33 of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”), matters which hitherto have not been considered by our courts.

In 2003, the [B] group decided to restructure. The appellant in this appeal, AQQ (“the Appellant”), was incorporated as part of the group’s restructuring exercise. The Appellant acquired several subsidiary companies in Singapore after obtaining the funds to do so by issuing convertible notes to a bank. Under the notes, the Appellant was required to make periodic interest payments to the bank.

During the relevant years of assessment, the acquired subsidiaries paid out dividends to the Appellant, which constituted income chargeable to tax. These dividends carried tax credits arising from tax deemed deducted at source which could be set off against tax payable on the Appellant’s chargeable income. At the same time, the Appellant duly paid the interest due under the notes to the bank. These interest payments constituted interest expenses which were deductible from the dividend income.

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

The respondent in this appeal, the Comptroller of Income Tax (“the Comptroller”), initially accepted the Appellant’s tax computation and issued notices of assessment whereunder the Appellant was to receive tax refunds. Subsequently, the Comptroller formed the view that the Appellant had engaged in a tax avoidance arrangement and purported to exercise his powers under s 33(1) of the Act to disregard both the dividend income and the interest expenses. He therefore issued notices of additional assessments which effectively recouped the earlier tax refunds.

The Appellant appealed against the Comptroller’s decision in Income Tax Appeal Nos 40–43 of 2008. The Income Tax Board of Review (“the Board”) dismissed the appeals. Dissatisfied with the Board’s decision in AQQ v Comptroller of Income Tax [2011] SGITBR 1 (“the Decision”), the Appellant now appeals to this court.

The central questions in this appeal are: whether the arrangement by which the Appellant incurred interest expenses which it set off against dividends from its subsidiaries constituted tax avoidance within the ambit of s 33; and whether the Comptroller was entitled to exercise his powers under s 33(1) in the manner that he did.

I now set out the material facts in some detail as they are essential for a proper understanding of the issues in the appeal.

The facts The Appellant

The Appellant was incorporated in Singapore in May 2003 pursuant to a restructuring exercise, and is a wholly-owned subsidiary of B Berhad (“[B]”), a Malaysian public company listed on the Malaysian stock exchange. [B] also wholly owns C Sdn Bhd (“[C]”), a Malaysian company.

As a result of the restructuring exercise, the Appellant became the holder of all the issued shares in the following Singapore companies, these being the subsidiary companies first referred to above at [2] (collectively, “the Subsidiaries”): D (Singapore) Pte Ltd (“[D]”); E (Singapore) Pte Ltd (“[E]”), now known as F (Singapore) Pte Ltd (“[F]”); G Enterprise Pte Ltd (“[G]”); and H Shipping & Trading Co Pte Ltd (“[H]”).

Background to the dispute Before the restructuring exercise

In 1950, [B] was incorporated in Malaya. In 1967, [B] entered into a joint venture with R Berhad (“[R]”) in Malaysia and Singapore.¹ Pursuant to the joint venture, [B] via [D] acquired a 50% equity interest in [F]. The other 50% equity interest was held by the [R] group. The [B] group and the [R] group also held [G] and [H], in addition to other companies, in the same 50:50 ratio.²

On 27 August 1998, [B] entered into various agreements with the [R] group to acquire the remaining 50% equity interests that it did not own in various companies, including [F], [G] and [H].³ The vehicle used for the acquisitions was [C].⁴ The result was that:⁵ [B] wholly owned [C] and [D]; [C] held 50% equity interests in [F], [G] and [H]; and [D] held the remaining 50% equity interests in [F], [G] and [H]. The resultant corporate structure is diagrammatically represented below: As can be seen, the interests in [F], [G] and [H] were held equally between [C] (a Malaysian company) and [D] (a Singapore company). This split in shareholding was what the later restructuring in 2003 sought to address.

Restructuring in 2003

Sometime in 2003, the [B] group decided to reorganise the corporate structure in Singapore according to various lines of business (namely, cement, readymix concrete, shipping and trading) and to mirror the group’s operating structure in Malaysia.⁶ [F], [G], [H] and [D] were involved in the (a) cement; (b) shipping; (c) readymix concrete; and (d) trading and drymix businesses respectively. The various purposes of the restructuring will be canvassed later in this judgment.

On 31 May 2003, the Appellant was incorporated as part of the restructuring exercise.⁷ On 31 July 2003, [B] acquired the entire issued and paid-up share capital of the Appellant, which comprised two ordinary shares of $1 each.⁸

On 18 August 2003, the Appellant acquired the following equity interests: [B’s] 100% equity interest in [D] for $75m;⁹ [C’s] 50% equity interests in [F], [G] and [H] for $75m;¹⁰ and [D’s] 50% equity interests in [F], [G] and [H] for $75m.¹¹ The acquisitions made by the Appellant may be represented as follows:

The final result of the restructuring is that the Appellant holds 100% equity interests in the Subsidiaries. The Appellant is in turn held wholly by [B]. Hence, the interests in [F], [G] and [H] are now consolidated and held singly by the Appellant, which now also wholly owns [D]. The result of the restructuring may be represented as follows:

The financing arrangement

In connection with the acquisition of the Subsidiaries, the Appellant entered into a financing arrangement (“the Financing Arrangement”) with [N Bank].

The Financing Arrangement involved the following transactions all carried out on the same day: On 18 August 2003, the Appellant issued $225m of fixed rate convertible notes (“the Notes”) with a tenor of ten years at an interest rate of 8.85% per annum to the Singapore Branch of [N Bank] (“[N Bank Singapore]”).¹² The Appellant then used the $225m facility from [N Bank Singapore] to finance its acquisition of the Subsidiaries. On the same day, [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]”) by entering into a sale and purchase agreement (incorporating a Conditional Payment Obligation (“CPO1”) and a forward sale) with [N Bank Mauritius]. Particulars are as follows:¹³ Pursuant to the sale and purchase agreement, [N Bank Singapore] sold $205m of the Principal Notes to [N Bank Mauritius] for $205m and, under CPO1, promised to pay [N Bank Mauritius] interest at 8.845% per annum provided that [N Bank Singapore] received the full interest from the Appellant under the Interest Coupons. [N Bank Singapore] also entered into a forward sale agreement with [N Bank Mauritius] for delivery of the remaining $20m of the Principal Notes by a future date against payment for the same by [N Bank Mauritius]. On the same day, [N Bank Mauritius] in turn sold the Principal Notes to [C] by entering into a sale and purchase agreement (incorporating a Conditional Payment Obligation (“CPO2”) and a forward sale agreement) with [C]. Particulars are as follows:¹⁴ Pursuant to the sale and purchase agreement, [N Bank Mauritius] sold $205m of the Principal Notes to [C] and, under CPO2, promised to pay interest at 8.84% per annum to [C] if [N Bank Mauritius] received full payment from [N Bank Singapore] under CPO1. [N Bank Mauritius] also entered into a forward sale agreement with [C] for delivery of the balance of $20m of the Principal Notes by a future date against payment for the same by [C].

Also on 18 August 2003, the following transactions were carried out to put [C] in funds to pay [N Bank Mauritius] for its purchase of the Principal Notes: [B] granted [C] an interest-free inter-company loan of $75m, that sum being the sale proceeds it received from the Appellant for its 100% equity interest in [D].¹⁵ [D] granted [C] an interest-free inter-company loan of $75m, that sum being the sale proceeds it received from the Appellant for its 50% equity interests in [F], [G] and [H]. The loan was disbursed in the following manner:¹⁶ [D] on behalf of [C] transferred $55m of the $75m loan to [N Bank Mauritius].¹⁷ [D] on behalf of [C] placed the balance of $20m as an investment deposit with [N Bank Singapore] to secure payment by [N Bank Mauritius] for the $20m of the Principal Notes sold forward by [N Bank Singapore] to [N Bank Mauritius].¹⁸

The flow of funds pursuant to the Financing Agreement and the other transactions are as follows:¹⁹ After the Appellant received the sum of $225m from [N Bank Singapore],²⁰ it paid:²¹ $75m to [F] (the designated collection agent of [B]²²) for the acquisition of [B’s] 100% equity interest in [D]; $75m to [F] (the designated collection agent of [C]²³) for the acquisition of [C’s] 50% equity interests in [F], [G] and [H]; and $75m to [D] for the acquisition of [D’s] 50% equity interests in [F], [G] and [H]. [F] (the designated collection agent of both [B] and [C]) paid $150m to [N Bank Mauritius] towards the purchase of the $205m of the Principal Notes.²⁴ [D] (on...