Comptroller of Income Tax v HY

• Jurisdiction: Singapore
• Judge: Chao Hick Tin JA
• Judgment Date: 07 March 2006
• Neutral Citation: [2006] SGCA 7
• Docket Number: Civil Appeal No 89 of 2005
• Date: 07 March 2006
• Year: 2006
• Published date: 09 March 2006
• Plaintiff Counsel: Liu Hern Kuan and Joyce Chee (Inland Revenue Authority of Singapore)
• Citation: [2006] SGCA 7
• Defendant Counsel: Leon Kwong Wing and Sharma Sundareswara (KhattarWong)
• Court: Court of Appeal (Singapore)
• Subject Matter: Revenue Law,Income taxation,Jurisdiction,Whether gains from exercise of stock options amounting to income under s 10(5) Income Tax Act,Whether income deriving from or accruing in Singapore,Sections 10(1), 10(5) Income Tax Act (Cap 134, 1996 Rev Ed)

7 March 2006 Judgment reserved.

Yong Pung How CJ (delivering the judgment of the majority):

1 The central issue in this appeal is whether the gains obtained by an individual through his exercise of certain employee stock options are liable to be taxed in Singapore.

Background

2 The facts are undisputed and straightforward. The taxpayer was employed as the chief financial officer of Standard Chartered PLC in the UK on 26 April 1990. From August 1990 to March 1994, the taxpayer acquired seven options under the Standard Chartered Executive Share Option Scheme (“the Option Scheme”) to acquire shares in his employer company. Under the Option Scheme, it was provided that the taxpayer would only be able to exercise the options: (a) three years after the date of grant; and (b) if he continued to be in employment within the Standard Chartered group of companies. Some months later in October 1994, the taxpayer was posted to the Singapore branch of Standard Chartered PLC where he has been employed since then.

3 In April 1997, about three years after he commenced employment in Singapore, the taxpayer decided to exercise the options and use the proceeds to purchase a house in Mauritius. On 28 April 1997, the taxpayer signed the notices of exercise of the options while he was in Singapore. In accordance with the rules in the Option Scheme, the notices of exercise, together with the option certificates and full payment for the shares which were the subject matter of the options, were then delivered to the registered office of Standard Chartered PLC in London. The taxpayer subsequently sold the shares on the London Stock Exchange. The sale proceeds were not remitted into Singapore.

4 The Comptroller of Income Tax (“the Comptroller”) imposed tax on the gain that the taxpayer had derived in exercising the stock options, which amounted to $5,044,710 (being the difference between the price the taxpayer paid for the shares in question and the price of those shares on the London Stock Exchange at the time the options were exercised).

5 The taxpayer appealed against the Comptroller’s assessment to the Income Tax Board of Review, which dismissed the appeal. On further appeal to the High Court, Choo Han Teck J (“the judge”) allowed the appeal, taking the view that the taxpayer’s gains from the exercise of the stock options were not taxable in Singapore (see HY v Comptroller of Income Tax [2005] 4 SLR 315).

The decision below

6 It appears that the judge approached the issue of whether the taxpayer’s stock option gains were taxable in Singapore by asking two questions: first, whether the gains qualified as “income” within the meaning of s 10(5) of the Income Tax Act (Cap 134, 1996 Rev Ed) (“the Act”) which was the applicable provision at the material time; and second, if so, whether such income fell to be taxed by virtue of s 10(1) of the Act.

7 The relevant parts of the then s 10(5) provided as follows:

Any gains … directly or indirectly derived by any person by the exercise … of a right … to acquire shares in a company shall, where the right … is obtained by that person by reason of any … employment held by him, be deemed to be income …

Section 10(1) states:

Income tax shall, subject to the provisions of this Act, be payable at the rate or rates specified hereinafter for each year of assessment upon the income of any person accruing in or derived from Singapore or received in Singapore from outside Singapore in respect of —

(a) …

(b) gains or profits from any employment;

…

(g) any gains or profits of an income nature not falling within any of the preceding paragraphs.

[emphasis added]

The parties were in agreement that, at the relevant time, gains derived from the exercise of a stock option fell within s 10(1)(g) and not s 10(1)(b).

8 The judge observed that s 10(5) did not state its territorial reach, there being no country specified or excluded. As a result, and because tax laws are territorial, in the judge’s view, the scope of s 10(5) had to be restricted to Singapore. In particular, the judge seemed to have thought that the phrase “by reason of any employment” under s 10(5) had to therefore refer to employment in Singapore. He went on to hold that an essential requirement for stock option gains to amount to income caught by s 10(5) was that the person exercising the option had to be employed in Singapore at the time the stock option was granted to him. As such, since the taxpayer was not employed in Singapore when the stock options were granted to him, the gains that he derived from exercising the options were not liable to be taxed in Singapore.

9 Given the judge’s conclusion that the taxpayer’s gains did not qualify as income under s 10(5) of the Act, he did not, strictly speaking, have to go further to consider whether those gains had “accrued in” or were “derived from” Singapore under s 10(1) (or as the judge put it, whether there was a material connection between the gains and Singapore). Nonetheless, in the course of his judgment, the judge still dealt with this issue by considering the location where the stock options were exercised by the taxpayer.

10 The judge was of the view that the place of exercise of the options had to be London and not Singapore. This was because the mere signing of the notices in Singapore was an incomplete act, and it was the act of delivering the notices together with payment to the Standard Chartered office in London which constituted the exercise of the options. As such, according to the judge, the gains in question had no material connection with Singapore and fell outside s 10(1)(g).

The appeal

11 Before us, counsel for the Comptroller made two main submissions. First, he submitted that the judge had erred in finding that the gains derived by the taxpayer from the exercise of the stock options did not constitute income falling under s 10(5) of the Act. Second, he submitted that those gains of the taxpayer were “derived from” or had “accrued in” Singapore, and were therefore liable to be taxed under s 10(1)(g). Each submission will be dealt with in turn.

Whether gains amounted to income under section 10(5) of the Act

12 Both parties presented arguments in respect of s 10(5). It is convenient at the outset to dispose of some of these arguments which clearly lack merit. Counsel for the Comptroller argued that the judge had erroneously relied on the majority ruling in the House of Lords decision of Abbott v Philbin (H M Inspector of Taxes) [1961] AC 352 (“the Abbott case”), which determined that stock options were taxable at the point of grant as opposed to the point of exercise and that the tax imposed would be based on the value of the options at the point of grant. This argument is obviously flawed. It is evident that the judge had appreciated that tax is not to be imposed at the point of grant, and instead should be imposed on the gains that are obtained from the exercise of the options. In fact, the judge explicitly accepted this as a consequence of the enactment of s 10(5). He stated at [6] of his judgment:

Consequent to the Abbott case, the English parliament amended their tax laws, and our Legislature did likewise in 1973, when it introduced the s 10(5) provision relied upon by the Comptroller in this case. Hence, as at 30 April 1997, a share option would be taxed at the time it was exercised. Thus, for income to be taxable under s 10(1)(g), it would be necessary to establish a connection between the appellant’s exercise of his stock options and Singapore. [emphasis added]

It further appears to be common ground in this appeal that the minority holding in the Abbott case represents the correct position under s 10(5), and the Comptroller’s arguments in this regard are hence of little relevance.

13 Turning to the arguments of the taxpayer, his counsel contends that the scope of s 10(5) was limited to stock option gains in Singapore. It is not exactly clear what is meant by such a contention. Counsel for the taxpayer referred to the following comment made by the then Minister of Finance Mr Hon Sui Sen during the Second Reading of the Income Tax (Amendment) Bill 1973 (Singapore Parliamentary Debates, Official Report (26 July 1973) vol 32 at cols 1244–1245):

The Stock Exchange, which witnessed a lot of speculative activity last year, also saw the emergence of “share option schemes”. Such share option schemes allow directors and employees to take an option to buy shares in the company at often a nominal price. Clause 3 of the Income Tax Act [which led to the insertion of s 10(5)] will make it clear beyond doubt that gains or profits from share option schemes are liable to income tax.

The argument appears to be that s 10(5) was created only to deal with stock option schemes relating to shares that are traded on the Singapore Stock Exchange. In addition, throughout the hearing before us and in his written submissions, counsel for the taxpayer maintains that this is a case involving stock options that were granted in the UK and that were exercised in the UK, in respect of shares traded on the UK stock exchange. Hence, it is argued, the option gains derived clearly fell outside the territorial limits of s 10(5).

14 The above arguments by counsel for the taxpayer are untenable. Firstly, the arguments assume that the stock options were exercised in the UK, when that is precisely a matter that is being disputed by the Comptroller. As for the contention that s 10(5) concerned only stock options in respect of shares traded on the Singapore Stock Exchange, it will suffice to refer to the following passages from the decision of the Income Tax Board of Review (HY v Comptroller of Income Tax [2004] SGITBR 4 at [28] and [29]) which rejected such a contention:

[T]he words “benefit… to acquire shares in a company,” when read in its grammatical and ordinary sense would include share options in any company wherever it is incorporated. This is in view of the statutory definition of...