Comptroller of Income Tax v AQQ

• Jurisdiction: Singapore
• Judgment Date: 26 February 2014
• Date: 26 February 2014
• Docket Number: Civil Appeals Nos 7 and 8 of 2013
• Court: Court of Appeal (Singapore)

Comptroller of Income Tax

Plaintiff

and

AQQ and another appeal

Defendant

[2014] SGCA 15

Sundaresh Menon CJ

,

Chao Hick Tin JA

and

Andrew Phang Boon Leong JA

Civil Appeals Nos 7 and 8 of 2013

Court of Appeal

Revenue Law—Income taxation—Additional assessment—Comptroller of Income Tax issuing additional assessments that calculated net tax liability by adding tax refunds that had previously been paid to taxpayer—Whether Comptroller of Income Tax had power under s 74 (1) Income Tax Act (Cap 134, 2008 Rev Ed) to issue additional assessments—Section 74 (1) Income Tax Act (Cap 134, 2008 Rev Ed)

Revenue Law—Income taxation—Avoidance—Taxpayer buying shareholdings in Singapore subsidiaries from parent company and parent company's subsidiaries—Purchase financed by issuance of fixed rate notes at rate of 8.85% per annum to a Singapore bank—Singapore bank detaching interest component and selling principal component of notes to its Mauritius branch—Mauritius branch selling on principal component of notes to Malaysian subsidiary of parent company—Chain of conditional payment agreements entered into so that Malaysian subsidiary would eventually receive sum equivalent to 8.84% interest on fixed rate notes—Malaysian subsidiary financing purchase through interest-free inter-company loans from parent company and Singapore subsidiary—Singapore subsidiaries consolidated under ownership of taxpayer and issuing dividends that carried tax credits under corporate tax imputation scheme to taxpayer—Taxpayer filing income tax returns that deducted interest expenses on fixed rate notes from dividend income and claiming tax credits—Taxpayer obtaining tax refunds from Comptroller of Income Tax—Comptroller of Income Tax finding that arrangement constituted tax avoidance arrangement under s 33 (1) Income Tax Act (Cap 134, 2008 Rev Ed) —Comptroller of Income Tax invoking his powers under s 33 (1) Income Tax Act to disregard dividend income and interest expenses—Whether arrangement entered into by taxpayer amounting to arrangement caught by s 33 (1) Income Tax Act—Whether taxpayer satisfying requirements of statutory exception under s 33 (3) (b) Income Tax Act—Whether Comptroller of Income Tax had properly exercised his powers under s 33 (1) Income Tax Act to counteract tax advantage—Sections 33, 33 (1) and 33 (3) (b) Income Tax Act (Cap 134, 2008 Rev Ed)

The taxpayer company (‘AQQ’) was a wholly owned subsidiary of [B] Bhd (‘BGroup’) and was incorporated as part of a corporate restructuring exercise (‘the Corporate Restructuring’) in which four companies [D] (Singapore) Pte Ltd (‘D’), [E] (Singapore) Pte Ltd (‘E’), [F] Enterprise Pte Ltd (‘F’) and [G] Shipping Pte Ltd (‘G’) (collectively known as ‘the Subsidiaries’) were consolidated under the ownership of AQQ. AQQ's ownership of the Subsidiaries was procured by AQQ's purchase of [C] Sdn Bhd's (‘C’) and D's respective 50% interests in E, F and G for $75 m each, and by AQQ's purchase of the BGroup's 100% interest in D for $75 m.

AQQ's purchase of the shareholdings was financed by the issuance of $225 m of fixed rate notes at an interest rate of 8.85% per annum (‘the Fixed Rate Notes’) to [N] Bank (‘N Bank’) acting through its Singapore branch (‘N Bank Singapore’). N Bank Singapore detached the interest rate component from the notes and sold $205 m of the principal component (‘the Principal Notes’) to [N] Bank (Mauritius) Limited (‘N Bank Mauritius’). Both parties entered into a further agreement for N Bank Singapore to pay N Bank Mauritius a sum equivalent to interest of 8.845%, conditional upon N Bank Singapore receiving interest payments from AQQ. N Bank Mauritius then sold on the $205 m of the Principal Notes to C, and the parties entered into an agreement for N Bank Mauritius to pay C a sum equivalent to interest of 8.840%, conditional upon N Bank Singapore receiving payment from AQQ. These transactions all took place on the same day. Arrangements were also made for interest-free inter-company loans totalling $150 m to be made to C from the BGroup and D, and these sums were transferred via intermediaries to N Bank Mauritius as payment for the Principal Notes. Three months later, the remaining $20 m of the Principal Notes were delivered by N Bank Singapore to N Bank Mauritius for cash consideration of $20 m and subsequently to C. This arrangement is referred to collectively as ‘the Financing Arrangement’.

The Subsidiaries issued dividends to AQQ from 2004 to 2007. These dividends carried tax credits pursuant to the imputation corporate taxation scheme under ss 44 and 44 A of the Income Tax Act (Cap 134, 2008 Rev Ed) (‘the Act’), which represented corporate tax paid at source by the Subsidiaries on its profits. The imputation scheme operated such that an equivalent sum would be credited to an account known as the s 44 account when a company paid tax on its profits. When dividends were paid by a shareholder, tax credits could be attached representing the tax that had previously been paid by the company, and these tax credits would then be debited from the s 44 account. As a matter of collection, the tax payable on the shareholder's chargeable income could then be set off with the tax credits under s 46. After it was announced in 2002 that Singapore would be moving to a single-tier corporate taxation system, companies were given a five-year transitional period under s 44 A to utilise their s 44 account balances.

In its tax returns for Years of Assessment (‘YA’) 2004 to 2007, AQQ declared the dividend income that it had received less the interest expenses on the Fixed Rate Notes. Based on these tax returns, AQQ would have been entitled to a total of $16,881,375 in tax credits on the dividends, but its tax liability on its dividend income was only $3,305,253.84. It therefore claimed to be entitled to a total tax refund of $13,576,121.16 (that is, $16,881,375 less $3,305,253.84) on the dividends.

Following an audit into AQQ, the Comptroller of Income Tax (‘the Comptroller’) invoked s 33 of the Act to ignore both the dividend income from the Subsidiaries and interest expenses and issued Notices of Additional Assessments for YA 2004 to 2006 (‘the Additional Assessments’) that assessed AQQ to an overall tax liability of $9,592,577.76. The Comptroller also similarly invoked s 33 for YA 2007 and assessed AQQ to a tax liability in the sum of $11,565.80.

AQQ appealed to the Income Tax Board of Review (‘the Board’), which upheld the Comptroller's assessment. An appeal was then filed to the High Court. The High Court judge (‘the Judge’) held that the Financing Arrangement was caught by s 33 (1) of the Act as it had the effect of reducing the amount of chargeable income through deductions of interest expenses arising from the Financing Arrangement. The Judge also determined that AQQ could not avail itself of the statutory exception under s 33 (3) (b) of the Act, and further, that the provisions of s 33 could not be overridden by the application of specific provisions of the Act under the Australian choice principle or the New Zealand scheme and purpose approach. However, the Judge was of the view that the Comptroller had not validly exercised his powers fairly and reasonably under s 33 (1) to counteract the tax advantage obtained by AQQ, and that the Additional Assessments as well as the Notice of Assessment for YA 2007 were invalid. In any event, the Judge also determined that the Comptroller did not have power under s 74 (1) of the Act to issue the Additional Assessments and they were accordingly null and void.

Both the Comptroller and AQQ appealed against the portions of the Judge's decision that went against them. The Comptroller's appeal was Civil Appeal No 7 of 2013 (‘CA 7/2013’) and AQQ's appeal was Civil Appeal No 8 of 2013 (‘CA 8/2013’)

Held, allowing CA 7/2013 in part and dismissing CA 8/2013:

(1) Section 33 (1) was triggered when the purpose or effect of an arrangement was to (a) alter the incidence of tax, (b) relieve a liability to pay tax, or (c) reduce or avoid any liability imposed or would have otherwise been imposed. An ‘arrangement’, as defined by s 33 (2) of the Act, was a composite term that meant the overarching scheme, agreement or transaction and included the component steps that carried into an effect an arrangement. The Comptroller was entitled to particularise the impugned arrangement as comprising both the Corporate Restructuring and the Financing Arrangement; this fell within the definition of ‘arrangement’:at [40] , [43] and [44] .

(2) The phrase ‘purpose or effect’ in s 33 (1) was to be construed conjunctively so as to refer to the objectively ascertained effect of the arrangement in question, in accordance with the ‘predication test’ that emerged from Lord Denning's judgment in Lauri Joseph Newton v Commissioner of Taxation of the Commonwealth of Australia[1958] 1 AC 450:at [45] .

(3) The threshold limb under s 33 (1) (c) caught arrangements that had the purpose or effect of reducing or avoiding any liability imposed or would have otherwise been imposed. The latter limb included a hypothetical liability that was about to fall on the taxpayer which the interpolation of the arrangement had the purpose or effect of reducing or avoiding. The plain meaning of the words ‘any liability imposed’ referred to legal liability to tax, that is, a liability that resulted from the application of any specific provision or combination of provisions of the Act:at [52] and [54] .

(4) There was clearly a liability that would have been imposed on AQQ had the Financing Arrangement not been entered into. Under s 10 (1) (d) of the Act, tax was payable in respect of ‘dividends, interests or discounts’, and the dividends received by AQQ clearly constituted income chargeable to tax under this section. A legal liability to tax therefore crystallised at the point the shareholder received dividend income that constituted chargeable income even if, as a...