Comptroller of Income Tax v AQQ and another appeal

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 26 February 2014
• Neutral Citation: [2014] SGCA 15
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeals No 7 and 8 of 2013
• Year: 2014
• Published date: 07 May 2014
• Hearing Date: 13 August 2013
• Plaintiff Counsel: Liu Hern Kuan, Joanna Yap Hui Min, Pang Mei Yu (Inland Revenue Authority of Singapore (Law Division)),Davinder Singh SC, Ong Sim Ho, Ong Ken Loon, Joanne Khoo Puay Pin, Darianne Lee (Drew & Napier LLC)
• Subject Matter: Revenue Law,Income Taxation,Avoidance
• Citation: [2014] SGCA 15

Sundaresh Menon CJ (delivering the judgment of the court):

These are two cross appeals against the decision of the High Court judge (“the Judge”) in AQQ v Comptroller of Income Tax [2013] 1 SLR 1361 (“the Judgment”), where he held that a financing arrangement that was entered into in conjunction with a corporate restructuring scheme amounted to tax avoidance within the meaning of s 33(1) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”). However, the Judge also held that the Comptroller of Income Tax (“the Comptroller”) had not acted reasonably and fairly in exercising his powers under s 33(1) to counteract the tax advantage that had thereby been obtained. Civil Appeal No 7 of 2013 (“CA 7/2013”) is the Comptroller’s appeal against the Judge’s holding that he had not acted reasonably and fairly in exercising his powers under s 33(1); Civil Appeal No 8 of 2013 (“CA 8/2013”) is the taxpayer’s appeal against the Judge’s holding that the financing arrangement amounted to a tax avoidance arrangement within the meaning of s 33(1) of the Act.

Background facts

The background facts are set out in considerable detail in the Judgment and we adopt them for the purpose of these appeals. We only highlight some material facts that are germane to the legal issues before us.

The taxpayer is AQQ, a Singapore incorporated company that is a wholly owned subsidiary of [B] Bhd (“B Group”), a company listed on Bursa Malaysia. Prior to 2003, B Group held its interests in various companies, namely, [C] Sdn Bhd (“C”), [D] (Singapore) Pte Ltd (“D”), [E] (Singapore) Pte Ltd (“E”), [F] Enterprise Pte Ltd (“F”) and [G] Shipping Pte Ltd (“G”), in the following manner:

The Corporate Restructuring

In 2002, changes were announced to the Singapore tax regime. These included the introduction of group tax relief and a move from the imputation system under s 44 of the Income Tax Act (Cap 134, 2001 Rev Ed) to a single tier corporate tax system with effect from 1 January 2003: see the then Deputy Prime Minister Mr Lee Hsien Loong’s Annual Budget Statement, Singapore Parliamentary Debates, Official Report (3 May 2002) vol 74 at cols 698–701.

Sometime in or about April 2003, the Board of Directors of B Group approved a proposed group restructuring of its Singapore operations (“the Corporate Restructuring”). The Corporate Restructuring involved the following steps:¹ the incorporation of AQQ with a paid up share capital of two ordinary shares of $1 each; the acquisition of the shares of AQQ by B Group on 31 July 2003; the disposal and transfer of C’s 50% interest in E, F and G to AQQ for cash consideration of $75m on 18 August 2003; the disposal and transfer of D’s 50% interest in E, F and G to AQQ for cash consideration of $75m on 18 August 2003; and, The disposal and transfer of B’s Group’s 100% interest in D to AQQ for cash consideration of $75m on 18 August 2003.

The result of the Corporate Restructuring was a streamlined corporate structure with D, E, F and G (“the Subsidiaries”) organised according to the various business lines of the group, namely, cement, readymix concrete, shipping and trading, under the umbrella of a single holding company (ie, AQQ):

The Financing Arrangement

Although this was in essence an internal corporate restructuring, AQQ’s acquisition of the equity interests in the Subsidiaries was to be effected at a total cost of $225m, which was to be financed through the issuance of $225m of fixed rate notes at an interest rate of 8.85% per annum with a tenure of ten years (“the Fixed Rate Notes”) to [N] Bank (“N Bank”) acting through its Singapore branch (“N Bank Singapore”) on 18 August 2003.

The following transactions were subsequently effected on the same day:² N Bank Singapore detached the interest component (“the Interest Coupons”) from the Fixed Rate Notes and sold $205m of the principal component of the Fixed Rate Notes (“the Principal Notes”) to [N] Bank (Mauritius) Limited (“N Bank Mauritius”) for cash consideration of $205m. N Bank Singapore agreed to pay N Bank Mauritius a sum equivalent to interest of 8.845%, or 0.005% less than what it was to receive from AQQ under the Interest Coupons, conditional upon N Bank Singapore receiving such payment from AQQ (“the Conditional Return”). N Bank Singapore agreed to deliver the remaining $20m of Principal Notes to N Bank Mauritius at a later date for cash consideration of $20m. N Bank Mauritius sold to C the $205m of Principal Notes which it purchased from N Bank Singapore, also for cash consideration of $205m. N Bank Mauritius agreed to pay C a sum equivalent to interest of 8.840%, or 0.005% less than what it was to receive from N Bank Singapore (see sub-paragraph (a) above), conditional upon N Bank Singapore receiving payment from AQQ under the Conditional Return. N Bank Mauritius agreed to deliver the remaining $20m of the Principal Notes (that it would receive from N Bank Singapore) to C at a later date for cash consideration of $20m. B Group granted an interest free intercompany loan of $75m to C. AQQ transferred $150m to E – the designated collection agent for the B Group and C – as payment for its acquisition of (i) the B Group’s 100% interest in D and (ii) C’s 50% interests in E, F, and G. AQQ transferred $75m to D as payment for its acquisition of D’s 50% interests in E, F, and G. E (on behalf of C) transferred $150m to N Bank Mauritius as payment for the Principal Notes. D granted an interest free intercompany loan of $75m to C using the proceeds that it had received from AQQ for the sale of its 50% interests in E, F and G. D (on behalf of C) transferred $55m (ie, a portion of the intercompany loan referred to in the preceding sub-paragraph) to N Bank Mauritius as payment for the Principal Notes. D (on behalf of C) placed $20m (ie, the balance of the intercompany loan referred to in sub-paragraph (i)) in an investment deposit with N Bank Singapore.

The flow of funds is diagrammatically represented below:

On or around 18 November 2003, a second set of transactions took place:³ D withdrew its $20m investment deposit with N Bank Singapore and transferred $20m to E, as collection agent for C (ie, the balance of the intercompany loan that D had granted to C). N Bank Singapore delivered the balance of the $20m of Principal Notes to N Bank Mauritius for cash consideration of $20m. N Bank Mauritius delivered the balance of the $20m of Principal Notes to C for cash consideration of $20m from E (on behalf of C).

The financing structure detailed above is hereafter referred to as the Financing Arrangement. The end result of these arrangements was that AQQ obtained $225m from N Bank and the entirety of this sum was effectively returned to N Bank on the same day, albeit following a circuitous route.

The section 44 accounts

The corporate taxation regime prior to 2003 under ss 44 and 46 of the Act as it then stood was known as the imputation scheme. Under this scheme, corporate profits would be taxed first at the corporate level. A sum equivalent to the amount of tax paid would then be credited to an account maintained by the company known as “the s 44 account”. When dividends were issued, the company could issue dividends with a tax credit attached reflecting the sum of tax that had previously been paid by the company on its profits. The tax credited to the shareholder in this manner would then be debited from the s 44 account balance. The overall effect of this scheme was that the dividend income would only be subject to tax once, but such that although it was paid up front by the company, it would ultimately be taxed at the marginal tax rate of the shareholder. Where there was a difference between the marginal rates applicable to the company’s profits and the shareholder’s income, the shareholder would be entitled to receive a net tax refund if the tax credits attached to the dividends exceeded the tax imposed on the shareholder in respect of those dividends.

After the move to a single tier corporate taxation regime was announced, companies with unutilised balances in their s 44 accounts were given a five year transitional period from 1 January 2003 to 31 December 2007 to remain on the imputation system before transitioning to the single tier corporate taxation regime. This was provided for under s 44A of the Act. The s 44 accounts were thereafter renamed the s 44A accounts, but for clarity, we refer in this judgment to these accounts without differentiation as “the s 44 accounts”.

As at 31 December 2002, the residual balances in the s 44 accounts and the accumulated profits of the Subsidiaries were:⁴

Subsidiary	Section 44 account balance	Accumulated profits
D	$17,916,948.66	$40,000.00
E	$7,354,359.65	$16,456,824.00
F	$1,952,523.91	$1,044,536.00
G	$1,391,292.12	$165,920.00

The tax assessments

AQQ paid interest of 8.85% per annum on the Interest Coupons to N Bank Singapore on a biannual basis, totalling $79,650,000 from 2004 to 2007. There was no allegation that these interest payments had not in fact been made. But as will be apparent from the transactions described at [8] and [10] above, as a result of the Interest Coupons being detached and the Principal Notes being sold on by N Bank Singapore to N Bank Mauritius and then to C, N Bank Singapore and N Bank Mauritius in fact each retained a spread of only 0.005% or a sum of $3982.50. The rest of the interest payments were paid on to C.

AQQ submitted the following tax returns for the years of assessment (“YA”) 2004 to 2007 reflecting the dividend income it received from the Subsidiaries as well as the interest payments it made to N Bank Singapore:⁵ for YA 2004, dividend income of $12,329,315 less interest expenses of $7,419,452; for YA 2005, dividend income of $30,952,630 less interest expenses of $19,852,015; for YA 2006, dividend income of...