Recent Singapore Income Tax Cases

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1 Recent Singapore Income Tax Cases Tax Bulletin June 2012 A number of income tax cases have been reported in the past few months. In this bulletin, we provide a summary of the facts, issues and decisions made in the four cases. AVD v Comptroller of Income Tax [2011] SGITBR 3 AVD concerns the waiver of what is known as the substantial shareholders test. In Singapore, unabsorbed tax losses or tax depreciation of a company can be carried forward to be utilised against future taxable income only where there is no substantial change of at least 50% or more in the total issued share capital of that company between prescribed comparison dates. Where there is indeed a substantial change, the Minister for Finance may waive the test if he is satisfied that the change was not for the purpose of deriving any tax benefit or obtaining any tax advantage. In AVD, there was a group restructuring involving members of a family. The shareholdings before and after the restructuring are shown in Diagram 1. Diagram 1: AVD v Comptroller of Income Tax Wishing to utilise tax losses it incurred before the substantial change in its shareholders, AVD wrote to the Comptroller of Income Tax (the Comptroller ) requesting a waiver of the test. The application was consistently refused on the premise that the change had taken place, not for commercial reasons, but for personal/private reasons. The Comptroller also referred to a circular first published on 17 July 1993, stating that the circumstances of AVD did not fall within any of the four scenarios (e.g. nationalisation, privatisation of a government-owned enterprise, change carried out for genuine commercial reasons) detailed in that circular. The matter later came before the Income Tax Board of Review (the Board ). 1

2 The Board stated that it was insufficient that the Comptroller suspected that the restructuring was driven by tax considerations. Objective evidence should be adduced to support that position and this he failed to do. The Board thought that the Comptroller was unduly focused on there being no commercial reasons for the change when the question was whether the substantial change was for the purpose of deriving any tax benefit. It was concluded that there was an unlawful fetter on the Comptroller s discretion and AVD s appeal was allowed. The decision makes it clear that the Comptroller is not to rigidly apply guidelines set out in circulars in considering the application of the law. It is also a reminder to all yet again about the importance of interpreting what is provided in the Income Tax Act and not taking public pronouncements as a substitute for the law. It has been repeated time and again that there is no equity in tax. Perhaps Mr Justice Rowlatt put it best in Cape Brandy Syndicate v CIR 1. In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. AYH v Comptroller of Income Tax [2011] SGITBR 4 AYH is primarily concerned with deductions for interest incurred on loans obtained for the acquisition of land plots and the construction of a new wing for an existing shopping mall. The timeline of the key events are illustrated in Diagram 2 below. Diagram 2: AYH v Comptroller of Income Tax AYH is what is termed a section 10E (of the Income Tax Act) company. This section was enacted to address the potential "windfall" situation for companies in the business of letting out investment properties they were able to claim capital allowances, carry forward losses and excess capital allowances, as well as avoid gains on disposals of the property from being taxed. The section provides rules for ascertaining the income of companies that are able to demonstrate that they carry on a business of the making of investments. It is, if you like, a half way house between a passive investment situation and a fully-fledged trading operation. One of the rules is that expenses incurred for non-income producing investments are not deductible. AYH was an owner-operator of a shopping mall which was completed in December In November 1997, the land plots adjacent to the existing shopping mall were acquired and a new wing was constructed. This new wing was built such that it integrated seamlessly with the existing shopping mall. The Temporary Occupation Permit for the new wing was issued in December Bank loans were previously 1 12 TC 358 2

3 obtained to finance the acquisition of the land plots as well as the construction of the new wing. The question was whether the interest costs incurred on those bank loans before the Temporary Occupation Permit was issued are tax deductible. The Comptroller rejected the claim and the matter was heard at the Board. To allow a deduction before the issue of the Temporary Occupation Permit, the Board must be satisfied that the new land plots as well as the new wing sitting on those plots formed part of the same investment as the original mall. In the Board s view, there was no credible evidence from AYH showing that the intention at the time of AYH s tender for the earlier land plots was also to bid for the new land plots and create an integrated mall. Indeed, when the new land plots were released for bidding, there were seven bidders and AYH decided that it would have to pay a premium in order to secure the plots. This uncertainty in the bidding process was one of the reasons the Board concluded that the new plots were a separate investment. Other factors were the matching of the gross plot ratio of the original site to that of the new plots upon acquiring the new plots. Further, the lease term of the new plots were arranged such that it coincided with the expiry date of the lease for the original plot. Given the above, it was decided that the new plots were a separate investment and therefore the relevant interest costs were not deductible. It has long been a bone of contention among tax practitioners as to whether interest costs incurred in similar circumstances are tax deductible. Many hold the view that so long as business has commenced, such costs should be deductible; these would have been revenue expenses incurred wholly and exclusively in the production of income. As a general principle, it should stand. AYH failed primarily because section 10E seems to go a stage further and sub-divides a business into separate investments. AYN Corporation v Comptroller of Income Tax [2012] SGITBR 1 This case should be of particular interest to foreign corporations with branches in Singapore. The issue was whether tax losses incurred by an old (de-registered) branch of a Japanese company can be utilised against the profits earned by the new branch of that same company. AYN Corporation had registered a branch in Singapore in May This was later deregistered in June 2004 by which time, it had accumulated tax losses of $30 million. A new branch was registered in April 2006 and the new branch sought to utilise the earlier losses against the profits earned in Year of Assessment (See Diagram 3 for the timeline.) This was denied by the Comptroller and the matter was heard before the Board. Diagram 3: AYN Corporation v Comptroller of Income Tax 3

4 The Comptroller argued that a branch is treated as a distinct and separate entity from the enterprise of which it is a part for income tax purposes and this is in line with Article 7 of the Japan-Singapore tax treaty. On that basis, the losses of the old branch should be ring-fenced and not be allowed to be set off against profits earned by the new branch. AYN Corporation, on the other hand, contended that a branch is legally but an extension of the head office. Moreover, section 37(3)(a) of the Income Tax Act talks about the amount of loss incurred by a person in any trade. It was argued that person meant the legal entity in the form of the foreign corporation and not the Singapore branch. The Board decided for the taxpayer. It was said that regardless of the business being carried on by the old or new branch, it was in fact AYN Corporation that carried on the business. As to a branch being regarded as a separate entity for tax treaty purposes, Article 7 was merely concerned with the allocation of profits to a permanent establishment. It does not dictate how a contracting state deals with the profits so allocated. In other words, section 37 is not modified by the tax treaty. In the past, the Comptroller has been known to allow losses incurred by an old branch to be used against profits earned by a new branch. It is therefore curious how this case even made it to the Board. Be that as it may, the decision is much welcome as it sets out the technical position clearly. Comptroller of Income Tax v AZP [2012] SGHC 112 While the earlier three cases revolved around more technical provisions, AZP is about the exchange of information clause within the Singapore-India tax treaty. The current Organisation for Economic Co-operation and Development model treaty language envisages the sharing of information that is foreseeably relevant to the administration and enforcement of a country s tax laws. Fishing expeditions, i.e. speculative requests for information that have no apparent link to an investigation, are not allowed. Where the information requested is protected by Singapore bank confidentiality rules, the Comptroller has to apply to the courts for access. In this case, the Comptroller made an application under section 105J of the Income Tax Act for an order requiring AZP, a bank in Singapore, to produce records and information relating to two bank accounts, from 1 January 2008 to date, held with AZP. Account 1 was held in the name of Company X and Account 2 was held in the name of Company Y. The Indian tax authorities had seized documents from an Indian national and believed that those documents indicated the existence of undeclared income and bank accounts overseas. It was alleged that the two accounts held with AZP were associated with the Indian national and the Indian tax authorities had therefore requested the Comptroller to facilitate the release of certain information under the Singapore-India tax treaty. The Comptroller s application was dismissed by the High Court. Choo Han Teck J was not satisfied that the information requested was foreseeably relevant for carrying out the provisions of the Singapore-India tax treaty because of inadequate supporting documentation provided by the Indian tax authorities. Companies X and Y were not Indian-incorporated entities. Nor were they under any investigation by the Indian tax authorities. The Indian tax authorities were not able to provide evidence of any transaction between the Indian national and either of the companies on or after 1 January 2008 (which is the effective date of the exchange of information clause). All that was provided was certain unsigned transfer instructions issued before

5 Ever since the incorporation of an exchange of information clause within many of Singapore s tax treaties, there have been concerns as to how stringent or liberal the courts would be in allowing access to information held by banks, trustees, or the like. After all, Singapore prides itself on the security and integrity of its banking information. While Singapore is obliged to meet its treaty obligations, the courts need to safeguard the privacy of taxpayers. A delicate balancing exercise, no doubt, but if AZP is any guide, it seems clear that the courts will ensure that only specific and concrete requests are entertained. 5

6 Contact us If you would like further information in relation to the issues outlined above, please call your usual PwC contact or any of the individuals listed below: Singapore Tax Partners and Directors Corporate Tax Alan Ross Sunil Agarwal Paul Cornelius Abhijit Ghosh Yvonne Goh Mahip Gupta Ho Mui Peng Lennon Lee Elaine Ng Tan Ching Ne Peter Tan Tan Tay Lek Teo Wee Hwee Financial Services Paul Lau Gavin Helmer Anuj Kagalwala Carrie Lim David Sandison Tan Tay Lek Teo Wee Hwee Yip Yoke Har Transfer Pricing Nicole Fung Gavin Helmer Kevin McCracken Mergers & Acquisitions Chris Woo Value Chain Transformation Kevin McCracken John Robinson Alan Ross Brad Slattery Indirect Tax (Goods and Services Tax) Koh Soo How Indirect Tax (Customs and International Trade) Frank Debets Gregory Nichols Personal Tax James Clemence Margaret Duong Girish Vikas Naik Ooi Geok Eng PricewaterhouseCoopers Services LLP. All rights reserved. PricewaterhouseCoopers and "PwC" refer to PricewaterhouseCoopers Services LLP or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate legal entity. 6