Comptroller of Income Tax v BBO

• Jurisdiction: Singapore
• Judge: Lai Siu Chiu J
• Judgment Date: 08 April 2013
• Neutral Citation: [2013] SGHC 74
• Court: High Court (Singapore)
• Docket Number: Originating Summons No 681 of 2012
• Published date: 18 April 2013
• Year: 2013
• Hearing Date: 07 January 2013
• Plaintiff Counsel: Foo Hui Min, David Lim, and Vikna Rajah (Inland Revenue Authority of Singapore)
• Defendant Counsel: Tan Kay Kheng and Tan Shao Tong (WongPartnership LLP)
• Subject Matter: Revenue Law,Income Taxation,Appeals
• Citation: [2013] SGHC 74

Lai Siu Chiu J: Introduction

This was an appeal under s 81(2) of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”) against the decision of the Income Tax Board of Review (“the Board”) dated 20 June 2012 (“the Decision”) in Income Tax Appeals Nos 3 and 4 of 2010 (“ITA 3 & 4 of 2010”). ITA 3 & 4 of 2010 were in turn appeals by BBO (“the Respondent”), an insurance company, against the decision of the Comptroller of Income Tax (“the Appellant”) to tax the gains arising from the disposal in 2001 of shares that the Respondent held in [C], [D] and [E] (collectively referred to as the “Core Shares”). In ITA 3 & 4 of 2010, the Board held that the gains arising from the disposal of the Core Shares by the Respondent were not assessable to tax under the Act (see BBO v The Comptroller of Income Tax [2012] SGITBR 2).

The background

The Respondent is a company registered in Singapore and is part of the [C] group of companies (“the [C] Group”). It carried on the business of a general insurer in Singapore and was registered under the Insurance Act (Cap 142, 2002 Rev Ed) (“the Insurance Act”) until December 2009. Under s 17(1) of the Insurance Act, an insurer is required to establish and maintain separate insurance funds for each class of its insurance business. The Respondent established the Singapore Insurance Fund (“SIF”) and the Offshore Insurance Fund (“OIF”) in respect of its Singapore and its overseas policies respectively. The Respondent used the SIF and the OIF to invest in [C] shares, and used the OIF in particular to invest in [D] and [E] shares. In the years of assessment (“YA”) 1973, 1976 1980–1981, 1984–1986, 1988 and 1995, the Respondent sold some of its [C] and [D] shares and reported those gains as taxable income.

On 29 June 2001, [F] Limited (“[F]”) offered to acquire [C] at a consideration comprising $4.02 in cash and 0.52 [F] share for each [C] share held (“the Takeover”), which offer [C] accepted. Pursuant to the Takeover, the Respondent sold to [F] its entire holding of [C] shares amounting to 13,459,214 shares in exchange for $54,106,040 in cash and 6,998,791 [F] shares. The Respondent also sold, in 2002, its portfolio of [D] and [E] shares in the OIF, amounting to 3,308,000 and 6,000 shares respectively, in exchange for $16,699,280 in cash. This resulted in the Respondent making gains of $89,246,800 from the sale of [C] shares, $7,934,100 from the sale of [D] shares, and $1,452,480 from the sale of [E] shares.

The Appellant took the view that the gains made by the Respondent were taxable and issued revised assessments for YA 2002 and YA 2003 to the Respondent. On 15 April 2010, the Appellant issued to the Respondent a Notice of Refusal to Amend the Assessments for YA 2002 and YA 2003.

On 19 April 2010, the Respondent filed Notices of Appeal against the Appellant’s revised assessments for both YA 2002 and YA 2003. The Board allowed the appeals and issued the Decision on 20 June 2012.

The law

For easy reference, the relevant provisions of ss 10(1), 26(1) and 26(3) of the Act are set out below:

Charge of income tax 10.—(1) 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) gains or profits from any trade, business, profession or vocation, for whatever period of time such trade, business, profession or vocation may have been carried on or exercised; ...

…

PART VII ASCERTAINMENT OF CERTAIN INCOME Profits of insurers 26.—(1) Subject to section 34A, this section has effect notwithstanding anything to the contrary in this Act except that nothing in this section shall affect the chargeability to tax of any income of an insurer under section 10.

...

Insurers other than life insurers (3) In the case of an insurer whether mutual or proprietary (other than a life insurer) where the gains or profits accrue in part outside Singapore, the gains or profits on which tax is payable shall be ascertained by — (a) taking the gross premiums and interest and other income received or receivable in Singapore (less any premiums returned to the insured and premiums paid on reinsurances); (b) deducting from the balance so arrived at a reserve for unexpired risks at the percentage adopted by the insurer in relation to its operations as a whole for such risks at the end of the period for which the gains or profits are being ascertained; (c) adding thereto a reserve similarly calculated for unexpired risks outstanding at the commencement of that period; and (d) from the net amount so arrived at, deducting the actual losses (less the amount recovered in respect thereof under reinsurance), the distribution expenses and management expenses incurred in the production of the income referred to in paragraph (a) and, in respect of a branch in Singapore, a fair proportion of the expenses of its head office. (4) For the purposes of subsection (3), in ascertaining the gains or profits derived by an insurer from carrying on the business (other than the business of life assurance) of insuring and reinsuring offshore risks or any other risks for the purposes of any concessionary rate of tax or exemption from tax prescribed by regulations made under section 43C — (a) no income other than income from premiums or from such dividends, interest and gains or profits realised from the sale of investments as may be specified in those regulations shall be included; (b) income in respect of dividends, interest and gains or profits realised from the sale of investments shall be apportioned in such manner as may be prescribed by those regulations; and (c) any item of expenditure not directly attributable to that business shall be apportioned in such manner as may be prescribed by those regulations. The decision of the Board

The Board held that: Profits from the sale of investments by insurance companies (other than life insurance companies) were not automatically liable to tax under ss 26(3) and 26(4) of the Act. The Board specifically made the following findings: sections 26(3) and 26(4) were not charging provisions and did not establish the principle that gains and profits from the sale of any investment would amount to income which was liable to tax; in cases involving insurance companies (other than life insurance companies), ss 26(3) and 26(4) did not do away with the distinction between, on the one hand, gains and profits arising from the disposal of shares which amounted to business or trading profits and, on the other hand, gains and profits arising from the disposal of shares which amounted to capital gains; insurance companies, like all other taxpayers, could hold shares as capital assets; and the real question was whether the Respondent’s gains from the sale of the Core Shares amounted to trading or business profits, which would then be taxable under s 10(1)(a), or whether they were in the nature of capital gains, which would not be taxable. In other words, one needed to investigate whether the sale of the investments in question arose in the course of a trade or business, or from the realisation of a capital asset. The Respondent had not engaged in any trade or business in the transaction of the Core Shares and the profits from the sale of the Core Shares should be treated as capital gains. The Board specifically made the following findings: the Core Shares were held for the long-term strategic purpose of preserving the corporate structure of the [C] Group; the Core Shares were held for a long time regardless of the method used to calculate the duration of holding, and this supported the argument that those shares were acquired for a long-term strategic purpose; the Appellant was not able to establish that the Core Shares were previously sold by the Respondent to meet its offshore claim liabilities; those of the Core Shares which the Respondent sold were sold to other companies within the [C] Group, which further reinforced the corporate preservation policy; and as [E] was not a listed company, the case in relation to the gains and profits derived by the Respondent from the sale of the [E] shares being capital gains was even stronger.

The issues before the court

The issues which needed to be addressed by this court were as follows: whether the gains made by the Respondent from the sale of the Core Shares were income in respect of gains or profits from the Respondent’s trade or business and, hence, taxable under s 10(1)(a) of the Act (“Issue 1”); and whether it was implied in ss 26(3) and 26(4) of the Act that gains or profits from the sale of investments by insurance companies other than life insurance companies (also known as general insurance companies) should be subject to tax (“Issue 2”).

The Appellant’s case

The Appellant had two main submissions: (a) the gains made by the Respondent from the sale of the Core Shares were taxable under s 10(1)(a) of the Act as, under common law principles, such gains were considered part of the Respondent’s insurance business; and (b) it was implied from ss 26(3) and 26(4) of the Act that gains or profits from the sale of investments by insurance companies, other than life insurance companies, should be subject to tax.

On the first submission, the Appellant accepted that an insurance company was capable of holding investments as capital assets, but argued that it was permissible only in the narrowest of circumstances. The Appellant gave seven reasons for taxing the gains made by the Respondent from the sale of the Core Shares: the Respondent had previously sold some of the Core Shares; the Respondent had purchased the Core Shares using monies in the insurance funds which it maintained pursuant to s 17(1) of the...