Jurisdiction - Singapore
Singapore – Tax Avoidance: When Is The Line Crossed?

1 April, 2014


Legal News & Analysis – Asia Pacific – Singapore – Tax


In Comptroller of Income Tax v AQQ and another appeal [2014] SGCA 15, the Court of Appeal provided rare judicial guidance on the scope and application of the general anti-avoidance provisions in Section 33 of the Income Tax Act (s 33), in its first decision since amendments were made more than 25 years ago giving the Comptroller powers to reconstruct a business transaction he disregards for tax purposes, and to impose tax.

The case involved a financing arrangement carried out together with a corporate restructuring. The taxpayer sought to obtain tax refunds for corporate taxes deducted at source on dividends from the taxpayer’s subsidiaries (tax credits) under the previous imputation system of corporate taxation. The Comptroller attacked the transaction as a composite scheme that comprised both the corporate restructuring and the financing arrangement under which interest bearing loans were taken where the funds were moved on the same day amongst entities within and outside Singapore.

Under s 33(1), the Comptroller may disregard or vary the transaction (called an arrangement), where he is satisfied that the taxpayer has obtained a tax advantage, in that the purpose or effect of the arrangement is directly or indirectly to:

(a) alter the incidence of tax payable or that would have been payable;
(b) relieve any person from any liability to pay tax or make a tax return; or
(c) reduce or avoid any tax liability imposed or that would have been imposed.

The Court found that the interest expenses under the financing arrangement had the purpose or effect, when viewed objectively, of reducing the tax liability upon the full amount of dividend income, thus facilitating the tax refunds. The transaction fell within limb (c).

However, the taxpayer had a statutory defence under s 33(3)(b), where the arrangement was carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax. What must be determined are the taxpayer’s commercial motives in entering into a transaction, viewed subjectively, and what purpose or effect the taxpayer sought to achieve or obtain out of the transaction, again viewed subjectively. The Court said the bona fide commercial reasons for a particular step in the arrangement should ordinarily be construed within the context of the entire economic and commercial reality of the arrangement. The Court could not conclude on the available evidence whether there were bona fide commercial reasons for the entire transaction under the first subjective test. But this was not material, because in relation to the second subjective test, the Court was satisfied that the corporate restructuring and the financing arrangement were not commercial transactions under which any tax avoidance or reduction was merely incidental by reference to the taxpayer’s real object. The Court found the taxpayer’s express intention was to obtain a tax benefit in the form of a reduction in tax liability on its dividend income from its subsidiaries, so as to secure the release of tax credits under the imputation system.

For the defence to succeed, the taxpayer had to pass both subjective tests cumulatively.

The Court also ruled the Comptroller must exercise his powers under s 33(1) in a fair and reasonable manner. The Court said it had a limited standard of review over the Comptroller’s exercise of discretion that did not warrant the Judge substituting his own view for that of the Comptroller as to how the tax advantage ought to have been counteracted. The Court stated it found no reasons to disturb the Comptroller’s exercise of his powers under s 33(1) in this case.


ATMD Bird & Bird


For further information, please contact:


Sundareswara Sharma, ATMD Bird & Bird

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