High Court · Decided 18 December 2012

AQQ v Comptroller of Income Tax

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[2012] SGHC 249Case no. Income Tax Appeal No 1 of 2011

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Income Tax Act 1947

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Andrew Ang J:
Introduction
[1] This appeal raises important issues pertaining to the proper interpretation and application of anti-avoidance provisions in s 33 of the Income Tax Act (Cap 134, 2008 Rev Ed) (“the Act”), matters which hitherto have not been considered by our courts.
[2] In 2003, the [B] group decided to restructure. The appellant in this appeal, AQQ (“the Appellant”), was incorporated as part of the group’s restructuring exercise. The Appellant acquired several subsidiary companies in Singapore after obtaining the funds to do so by issuing convertible notes to a bank. Under the notes, the Appellant was required to make periodic interest payments to the bank.
[3] During the relevant years of assessment, the acquired subsidiaries paid out dividends to the Appellant, which constituted income chargeable to tax. These dividends carried tax credits arising from tax deemed deducted at source which could be set off against tax payable on the Appellant’s chargeable income. At the same time, the Appellant duly paid the interest due under the notes to the bank. These interest payments constituted interest expenses which were deductible from the dividend income.
[4] When tax for the relevant years of assessment came to be assessed, the Appellant in its tax returns claimed the deduction of the interest expenses from the dividend income as well as the benefit of the tax credits. The combined effect of claiming both was the precipitation of substantial tax refunds to the Appellant.
[5] The respondent in this appeal, the Comptroller of Income Tax (“the Comptroller”), initially accepted the Appellant’s tax computation and issued notices of assessment whereunder the Appellant was to receive tax refunds. Subsequently, the Comptroller formed the view that the Appellant had engaged in a tax avoidance arrangement and purported to exercise his powers under s 33(1) of the Act to disregard both the dividend income and the interest expenses. He therefore issued notices of additional assessments which effectively recouped the earlier tax refunds.
[6] The Appellant appealed against the Comptroller’s decision in Income Tax Appeal Nos 40–43 of 2008. The Income Tax Board of Review (“the Board”) dismissed the appeals. Dissatisfied with the Board’s decision in AQQ v Comptroller of Income Tax [2011] SGITBR 1 (“the Decision”), the Appellant now appeals to this court.
[7] The central questions in this appeal are:
(a) whether the arrangement by which the Appellant incurred interest expenses which it set off against dividends from its subsidiaries constituted tax avoidance within the ambit of s 33; and
(b) whether the Comptroller was entitled to exercise his powers under s 33(1) in the manner that he did.
[8] I now set out the material facts in some detail as they are essential for a proper understanding of the issues in the appeal.
The facts
The Appellant
[9] The Appellant was incorporated in Singapore in May 2003 pursuant to a restructuring exercise, and is a wholly-owned subsidiary of B Berhad (“[B]”), a Malaysian public company listed on the Malaysian stock exchange. [B] also wholly owns C Sdn Bhd (“[C]”), a Malaysian company.
[10] As a result of the restructuring exercise, the Appellant became the holder of all the issued shares in the following Singapore companies, these being the subsidiary companies first referred to above at [2] (collectively, “the Subsidiaries”):
(a) D (Singapore) Pte Ltd (“[D]”);
(b) E (Singapore) Pte Ltd (“[E]”), now known as F (Singapore) Pte Ltd (“[F]”);
(c) G Enterprise Pte Ltd (“[G]”); and
(d) H Shipping & Trading Co Pte Ltd (“[H]”).
Background to the dispute
Before the restructuring exercise
[11] In 1950, [B] was incorporated in Malaya. In 1967, [B] entered into a joint venture with R Berhad (“[R]”) in Malaysia and Singapore. Pursuant to the joint venture, [B] via [D] acquired a 50% equity interest in [F]. The other 50% equity interest was held by the [R] group. The [B] group and the [R] group also held [G] and [H], in addition to other companies, in the same 50:50 ratio.
[12] On 27 August 1998, [B] entered into various agreements with the [R] group to acquire the remaining 50% equity interests that it did not own in various companies, including [F], [G] and [H]. The vehicle used for the acquisitions was [C]. The result was that:
(a) [B] wholly owned [C] and [D];
(b) [C] held 50% equity interests in [F], [G] and [H]; and
(c) [D] held the remaining 50% equity interests in [F], [G] and [H].
The resultant corporate structure is diagrammatically represented below:
As can be seen, the interests in [F], [G] and [H] were held equally between [C] (a Malaysian company) and [D] (a Singapore company). This split in shareholding was what the later restructuring in 2003 sought to address.
Restructuring in 2003
[13] Sometime in 2003, the [B] group decided to reorganise the corporate structure in Singapore according to various lines of business (namely, cement, readymix concrete, shipping and trading) and to mirror the group’s operating structure in Malaysia. [F], [G], [H] and [D] were involved in the (a) cement; (b) shipping; (c) readymix concrete; and (d) trading and drymix businesses respectively. The various purposes of the restructuring will be canvassed later in this judgment.
[14] On 31 May 2003, the Appellant was incorporated as part of the restructuring exercise. On 31 July 2003, [B] acquired the entire issued and paid-up share capital of the Appellant, which comprised two ordinary shares of $1 each.
[15] On 18 August 2003, the Appellant acquired the following equity interests:
(a) [B’s] 100% equity interest in [D] for $75m;
(b) [C’s] 50% equity interests in [F], [G] and [H] for $75m; and
(c) [D’s] 50% equity interests in [F], [G] and [H] for $75m.
The acquisitions made by the Appellant may be represented as follows:
[16] The final result of the restructuring is that the Appellant holds 100% equity interests in the Subsidiaries. The Appellant is in turn held wholly by [B]. Hence, the interests in [F], [G] and [H] are now consolidated and held singly by the Appellant, which now also wholly owns [D]. The result of the restructuring may be represented as follows:
The financing arrangement
[17] In connection with the acquisition of the Subsidiaries, the Appellant entered into a financing arrangement (“the Financing Arrangement”) with [N Bank].
[18] The Financing Arrangement involved the following transactions all carried out on the same day:
(a) On 18 August 2003, the Appellant issued $225m of fixed rate convertible notes (“the Notes”) with a tenor of ten years at an interest rate of 8.85% per annum to the Singapore Branch of [N Bank] (“[N Bank Singapore]”). The Appellant then used the $225m facility from [N Bank Singapore] to finance its acquisition of the Subsidiaries.
(b) On the same day, [N Bank Singapore] detached and retained the interest coupons (“the Interest Coupons”) from the Notes and sold the principal component of the Notes (“the Principal Notes”) to the Mauritius Branch of [N Bank] (“[N Bank Mauritius]”) by entering into a sale and purchase agreement (incorporating a Conditional Payment Obligation (“CPO1”) and a forward sale) with [N Bank Mauritius]. Particulars are as follows:
(i) Pursuant to the sale and purchase agreement, [N Bank Singapore] sold $205m of the Principal Notes to [N Bank Mauritius] for $205m and, under CPO1, promised to pay [N Bank Mauritius] interest at 8.845% per annum provided that [N Bank Singapore] received the full interest from the Appellant under the Interest Coupons.
(ii) [N Bank Singapore] also entered into a forward sale agreement with [N Bank Mauritius] for delivery of the remaining $20m of the Principal Notes by a future date against payment for the same by [N Bank Mauritius].
(c) On the same day, [N Bank Mauritius] in turn sold the Principal Notes to [C] by entering into a sale and purchase agreement (incorporating a Conditional Payment Obligation (“CPO2”) and a forward sale agreement) with [C]. Particulars are as follows:
(i) Pursuant to the sale and purchase agreement, [N Bank Mauritius] sold $205m of the Principal Notes to [C] and, under CPO2, promised to pay interest at 8.84% per annum to [C] if [N Bank Mauritius] received full payment from [N Bank Singapore] under CPO1.
(ii) [N Bank Mauritius] also entered into a forward sale agreement with [C] for delivery of the balance of $20m of the Principal Notes by a future date against payment for the same by [C].
[19] Also on 18 August 2003, the following transactions were carried out to put [C] in funds to pay [N Bank Mauritius] for its purchase of the Principal Notes:
(a) [B] granted [C] an interest-free inter-company loan of $75m, that sum being the sale proceeds it received from the Appellant for its 100% equity interest in [D].
(b) [D] granted [C] an interest-free inter-company loan of $75m, that sum being the sale proceeds it received from the Appellant for its 50% equity interests in [F], [G] and [H]. The loan was disbursed in the following manner:
(i) [D] on behalf of [C] transferred $55m of the $75m loan to [N Bank Mauritius].
(ii) [D] on behalf of [C] placed the balance of $20m as an investment deposit with [N Bank Singapore] to secure payment by [N Bank Mauritius] for the $20m of the Principal Notes sold forward by [N Bank Singapore] to [N Bank Mauritius].
[20] The flow of funds pursuant to the Financing Agreement and the other transactions are as follows:
(a) After the Appellant received the sum of $225m from [N Bank Singapore], it paid:
(i) $75m to [F] (the designated collection agent of [B]) for the acquisition of [B’s] 100% equity interest in [D];
(ii) $75m to [F] (the designated collection agent of [C]) for the acquisition of [C’s] 50% equity interests in [F], [G] and [H]; and
(iii) $75m to [D] for the acquisition of [D’s] 50% equity interests in [F], [G] and [H].
(b) [F] (the designated collection agent of both [B] and [C]) paid $150m to [N Bank Mauritius] towards the purchase of the $205m of the Principal Notes.
(c) [D] (on behalf of [C]) paid $55m to [N Bank Mauritius] for the purchase of the $205m of the Principal Notes.
(d) [D] (on behalf of [C]) placed $20m as an investment deposit with [N Bank Singapore].
(e) [N Bank Mauritius] paid $205m to [N Bank Singapore] for the purchase of the $205m of the Principal Notes.
[21] On 18 November 2003, the following transactions and flow of funds took place with respect to the balance $20m of the Principal Notes:
(a) [D] (on behalf of [C]) withdrew the $20m investment deposit from [N Bank Singapore] and transferred $20m to [F] (the designated collection agent of [C]);
(b) [F] (as payment agent of [C]) paid the $20m to [N Bank Mauritius] which in turn paid the same to [N Bank Singapore]; and
(c) [N Bank Singapore] delivered the $20m of the Principal Notes to [N Bank Mauritius] in consideration of such payment and [N Bank Mauritius] in turn delivered the same $20m of the Principal Notes to [C] in consideration of payment made for the same by [F] (as payment agent of [C]).
Dividends and changes to the tax regime
[22] Subsequent to the reconstruction, the Subsidiaries paid dividends to the Appellant. These dividends carried tax credits pursuant to the full imputation system. It is necessary, for an understanding of this case, to outline the workings of the full imputation system.
[23] Before 1 January 2003, Singapore had in force the full imputation system for taxation of dividends. This system is succinctly described in Angela Tan, Singapore Master Tax Guide Handbook 2009/10 (CCH Asia Pte Ltd, 28th Ed, 2009) as follows (at p 288):
[24] The full imputation system was implemented through the account mechanism under s 44 of the Act. Every resident company was required to maintain a s 44 account. Whenever a resident company paid tax on its chargeable income, an amount equivalent to the amount of tax paid would be credited to its s 44 account. The resident company was entitled to use the balance in its s 44 account to frank dividends paid to its shareholders so that the gross amount of dividend attributable to the shareholder was the aggregate of the cash amount he actually received and the tax credited to him as having been paid. When the resident company paid franked dividends, the tax credited to each shareholder was debited from the company’s s 44 account balance. When a shareholder received the franked dividends, he was entitled to set off the amount of tax credit carried by the franked dividends (which is essentially the same amount as the tax paid by the company on the gross dividends) against the tax payable on his chargeable income from all sources. Through this s 44 account mechanism, tax paid by a resident company on its chargeable income was passed on to its shareholder as a tax credit upon the payment of franked dividends by the company to the shareholder.
[25] The workings of the full imputation system may be illustrated as follows. Take, for example, a resident company that has a chargeable income of $100. Assume that the company’s s 44 account balance is nil, and the prevailing corporate tax rate is 20%. The company duly pays the $20 tax. Hence, its s 44 account balance increases from nil to $20, and the cash in hand after tax is $80. Using its s 44 account balance, the company may pay to its shareholders a gross dividend of $100, made up of a net cash dividend of $80 franked with $20 worth of tax deemed paid by the shareholders. After such franking, $20 will be debited from the company’s s 44 account balance, which will then revert to nil.
[26] How does the company’s shareholder compute his tax payable after receiving franked dividends from the company? For ease of illustration, assume that the same company has only one shareholder, and this same shareholder is not entitled to any tax relief or deductions against income and that his only source of income is the gross dividend paid by the company. Assume also that the tax rate applicable to him is 10%. When the shareholder is assessed to tax on his chargeable income (that being the gross dividend as there are no other sources of income), his tax liability will be $10, being 10% of $100. However, since the shareholder by reason of the tax credit is deemed to have paid tax of $20, he is entitled to set off the tax credit carried by the franked dividends (ie, $20 deemed paid at source) against his tax liability of $10. Hence, the overall result is that the shareholder is entitled to a tax refund of $10 (ie, $20 minus $10) from the Comptroller. The computation may be set out as in the table below:
[27] In the example above, the shareholder is entitled to a tax refund because his personal income tax rate of 10% is lower than the company’s corporate income tax rate of 20%. Per contra, if the shareholder’s applicable tax rate were higher than 20%, he would have to pay the Comptroller the difference between that higher tax and the tax credit of 20%.
[28] Continuing with the example above, assume that the shareholder incurred an interest expense of $90 in respect of funds he had borrowed to acquire the company’s shares. The interest expense of $90 is deductible against the gross dividend income of $100 so that the chargeable income is $10. The tax payable on the chargeable income is hence $1, being 10% of $10. The $20 of tax credit (ie, $20 deemed paid at source) carried by the franked dividends is then set off against the tax liability of $1, resulting in a tax refund of $19 to the shareholder. The computation may be set out as in the table below:
(As will be observed later in this judgment, the Appellant was initially able to claim massive amounts of tax refunds because it incurred large amounts of interest expenses on the Notes.)
[29] On 1 January 2003, Singapore replaced the full imputation system with a one-tier corporate tax system. Under the one-tier corporate tax system, the tax paid by resident companies on their chargeable income constitutes a final tax and will not be imputed to shareholders who receive dividends from such companies. Correspondingly, shareholders will not be taxed on dividends received under the one-tier corporate tax system.
[30] Resident companies with unutilised s 44 account balances as at 31 December 2002 were given an option to remain on the full imputation system (for a transitional period of five years from 1 January 2003 to 31 December 2007) to enable them to use up their s 44 account balances by paying franked dividends (if they were able so to do) before moving to the one-tier corporate tax system. Alternatively, they could move to the one-tier corporate tax system (in which case they may no longer pay franked dividends). Resident companies that chose to remain on the full imputation system would automatically move to the one-tier corporate tax system on 1 January 2008 after expiry of the transitional period. Hence, from 1 January 2008 onwards, all resident companies would be on the one-tier corporate tax system.
[31] The crucial fact here is that the Subsidiaries chose to remain under the full imputation system during the transitional period. Hence, the Subsidiaries could continue to utilise their s 44 account balances by paying franked dividends during the transitional period. The Subsidiaries’ s 44 account balances and accumulated profits as at 31 December 2002 before they were acquired by the Appellant were as follows:
As can be seen, the Subsidiaries had substantial s 44 account balances.
[32] The Subsidiaries paid out franked dividends amounting to $83,173,945 to the Appellant for Years of Assessment (“YA”) 2004 to 2007. As mentioned earlier, these franked dividends carried tax credits.
The tax dispute
[33] The Appellant paid interest on the Notes to [N Bank Singapore] at 8.85% per annum amounting to $67,096,467 for YA 2004 to 2007.
[34] As the Financing Arrangement enabled the Appellant to acquire the Subsidiaries and to receive the dividends paid out of the distributable profits of the Subsidiaries, the interest paid by the Appellant on the Notes was therefore claimed as a deduction against the dividend income of the Appellant. In its tax returns for YA 2004 to 2007, the Appellant claimed interest deductions totalling $67,096,467 for the interest it paid against the dividend income represented by the franked dividends amounting to $83,173,945. As a result, the Appellant claimed a total tax refund of $13,561,794.44 pursuant to ss 44A and 46.
[35] Based on the Appellant’s tax returns for YA 2004 to 2006, the Comptroller issued Notices of Assessment for YA 2004 to 2006 (“the Original Assessments”) on 24 September 2004, 27 August 2005 and 8 November 2006 respectively which took into account the interest deductions claimed by the Appellant and dividend income received by the Appellant from the Subsidiaries. Consequently, tax refunds for YA 2004 to 2006 amounting to $9,589,816.84 were made to the Appellant under the Original Assessments.
[36] However, on 7 April 2008, the Comptroller informed the Appellant that he was not satisfied that there was commercial justification for the Financing Arrangement and stated that the arrangement was for the main purpose of deriving a tax advantage.
[37] Consequently, the Comptroller invoked s 33 and revised his earlier assessments. The Comptroller issued Notices of Additional Assessment for YA 2004 to 2006 (“the Additional Assessments”) that disregarded the dividend income received by the Appellant from the Subsidiaries and the interest expenses incurred by the Appellant on the Notes issued to [N Bank Singapore], and assessed the Appellant to have a total overall net tax liability of $9,592,577.76 for YA 2004 to 2006.
[38] On or about 31 March 2007, the Appellant filed its tax return and tax computation for YA 2007 which showed the receipt of dividend income from its holding of shares in the Subsidiaries and the incurring of interest expenses on the Notes issued to [N Bank Singapore]. Based on that tax return and tax computation, the Appellant should have received a further refund of $3,971,977.60.
[39] Consistent with his stand with respect to YA 2004 to 2006, the Comptroller similarly invoked s 33 and disregarded the dividend income and interest expenses for YA 2007 in his Notice of Assessment for YA 2007 dated 28 August 2008, with the result that the Appellant had a net tax liability of $11,565.80.
[40] The Appellant objected to the Additional Assessments and the Notice of Assessment for YA 2007. The Comptroller refused to amend the same. The Appellant appealed to the Board.
Decision of the Board
[41] Upholding the Comptroller’s decision, the Board held that the Financing Arrangement had the purpose or effect of tax avoidance within the meaning of s 33(1). The Board found that the Financing Arrangement was contrived and artificial or was structured in a contrived and artificial way in order for the Appellant to obtain a refund of tax through the utilisation of tax credits; it was also not carried out for bona fide commercial reasons but had, as one of its main purposes, the avoidance or reduction of tax.
[42] The Board essentially reasoned as follows:
(a) There was no real commercial justification for the loan given by [N Bank Singapore] to the Appellant, other than as part of an arrangement entered into to obtain or extract tax benefits, for the following reasons:
(i) The Appellant did not adduce minutes of meetings or other records of discussions by the directors of the Appellant and/or [B] regarding the commercial considerations justifying the loan.
(ii) Instead, there was an undated discussion paper of [N Bank] which revealingly indicated that the purpose of the Financing Arrangement as a whole and the loan in particular was to obtain or extract tax benefits.
(b) There was unsatisfactory treatment in the evidence at the appeal regarding how the sums to be paid by the Appellant for the acquisition of the equity interests in the Subsidiaries were arrived at.
(c) The manner in which the transactions in the Financing Arrangement had been entered into or carried out were “contrived”, “artificial”, “strained”, “forced”, “planned with ingenuity” and “out of the ordinary” because:
(i) all the transactions took place on the same day (ie, 18 August 2003), with the exception of the $20m of the Principal Notes, and there was no explanation why the restructuring had to be completed on the same day.
(ii) the Appellant effectively borrowed money from another company within the group, namely, [C], to acquire the Subsidiaries and [C] in turn borrowed money from [D] and [B] to acquire the Notes. Counsel for the Comptroller was right to point out that if the Appellant had wanted to borrow money, it could simply have borrowed from [C] without involving [N Bank] as an intermediary and that the Appellant was merely involved in a round-robin flow of funds.
(iii) the role of [N Bank] in the Financing Arrangement was merely facilitative and not really that of a lender. It did not bear any risk as a lender of the $225m loan.
(A) The interest “earned” by [N Bank Singapore] would be returned to the [B] group in the form of conditional payments (ie, via CPO1 and CPO2) and [N Bank Singapore’s] reward for participating in the arrangement was only in the form of the fee for structuring and arranging the Financing Arrangement.
(B) The interposition of [N Bank] as a facilitator was to help the [B] group to achieve the tax saving purpose mentioned in the discussion paper entitled “Fixed Rate Notes Financing Structure”.
(iv) the interposition of [N Bank Mauritius] lacked commercial justification. There was no real commercial necessity for [N Bank Mauritius] to be also involved in the Financing Arrangement, other than to take advantage of the exemption of the interest payments from withholding tax.
[43] The Board held that s 14 of the Act was not intended to apply in this case where the link between the loan and the dividend income was artificially created, and the Appellant was incorporated pursuant to an artificial and contrived financing arrangement in order to obtain the benefit of the s 44 credits for YA 2004 to 2007.
[44] The Board also held that the interest payments were artificial because the interest paid by the Appellant to [N Bank Singapore] was in substance returned to the [B] group in the form of conditional payments.
[45] The Board ruled that the full imputation system was not meant to be used in the manner the Appellant did. The tax credits available to shareholders under the full imputation system were not intended to be available to shareholders such as the Appellant who received dividends from the Subsidiaries that were acquired pursuant to an artificial or contrived arrangement.
[46] The Board held that the Comptroller had the power and authority under s 74 of the Act to issue the Additional Assessments and assess the Appellant to additional tax.
[47] The Board hence dismissed the appeal and issued its Decision on 12 April 2011. The Appellant appeals to this court under s 81(2).
The Appellant’s case
[48] Counsel for the Appellant contends that based on the evidence presented and the Board’s own findings, the Decision was one which, because the Board misdirected itself on the law and the evidence, no reasonable body of members constituting an Income Tax Board of Review could have reached.
[49] Counsel essentially argues that:
(a) The Board adopted the wrong approach towards s 33(1) when it asked whether the Financing Arrangement was “artificial” or “contrived”.
(b) Instead, the Board should have examined the facts and evidence and determined whether the elements in sub-paras (a) to (c) of s 33(1) were met.
(c) The Financing Arrangement did not fall within sub-paras (a), (b) or (c) of s 33(1). Hence, s 33(1) was not even engaged.
(d) Even if the Financing Arrangement did fall within sub-paras (a), (b) or (c) of s 33(1), the Financing Arrangement was carried out for bona fide commercial reasons and did not have as one of its main purposes the avoidance or reduction of tax within the meaning of s 33(3)(b). In this respect, the Board reached a conclusion that no reasonable Income Tax Board of Review could reach on the evidence before it.
(e) Even if the Board was correct in finding that s 33(1) had been engaged and that the statutory exception in s 33(3)(b) did not apply, the Board erred in law when it failed to give effect to the relevant specific provisions of the Act (ie, ss 14(1)(a), 44, 44A and 46) which conferred upon the Appellant the entitlement to the tax refund.
(f) Even if s 33 applied, the Board was wrong to hold that the Comptroller was entitled to disregard both the dividend income and interest expenses, when the Comptroller should not have disregarded both.
(g) In any case, the Comptroller did not have the power under s 74 to assess the Appellant as to the additional amounts for YA 2004 to 2006, and hence the Additional Assessments were ultra vires and void.
[50] The details of the arguments will be canvassed at the appropriate junctures in the course of this judgment.
The Comptroller’s case
[51] Counsel for the Comptroller essentially contends that:
(a) The Financing Arrangement falls within sub-paras (a), (b) or (c) of s 33(1). Hence, s 33(1) was engaged.
(b) The Financing Arrangement does not fall within the statutory exception in s 33(3)(b).
(c) The Appellant cannot rely on the relevant specific provisions of the Act (ie, ss 14(1)(a), 44, 44A and 46) to override the operation of s 33.
(d) The Comptroller had the power to disregard both the dividend income and interest expenses under s 33.
(e) The Comptroller had the power under s 74 or, alternatively, under s 33, to assess the Appellant as to the additional amounts for YA 2004 to 2006.
[52] The details of counsel’s arguments will similarly be dealt with at appropriate junctures in the course of this judgment.
Issues
[53] The issues before me are as follows:
(a) Whether the Board adopted the right approach towards s 33;
(b) Whether the Financing Arrangement fell within any of the three limbs of s 33(1);
(c) Whether the Appellant could avail itself of the statutory exception under s 33(3)(b);
(d) Whether the Appellant could avail itself of the relevant specific provisions of the Act (ie, ss 14(1)(a), 44, 44A and 46) and override the operation of s 33;
(e) Whether the Comptroller was right to disregard both the dividend income and interest expenses under s 33; and
(f) Whether the Comptroller had the power to issue the Additional Assessments.
Approach towards appeals against decisions of the Board
[54] Before proceeding to consider the issues, it is important to understand the approach that this court should adopt in appeals against decisions of the Board under s 81(2) of the Act.
[55] Section 81(2) allows the taxpayer or the Comptroller to appeal from a decision of the Board to the High Court where, inter alia, the question arising in the appeal is one of law or one of mixed fact and law:
There is hence no appeal on questions of fact alone (HLB v Comptroller of Income Tax [1974–1976] SLR(R) 135 at [1]; NP v Comptroller of Income Tax [2007] 4 SLR(R) 599 at [6] (“NP v CIT”)).
[56] Various formulations have been expressed as to the proper approach in appeals from decisions of the Board. The proper test to apply in appeals under s 81(2) is to ask whether the Board had misdirected itself in law, or had proceeded without sufficient evidence in law to justify its conclusion (CBH v Comptroller of Income Tax [1981–1982] SLR(R) 273 at [4]). Whilst the findings of fact made by the Board would generally be respected, the court is free to decide whether the conclusion reached by the Board is consonant with the facts found and to reject the Board’s conclusions if the same are unreasonable (NP v CIT). To succeed in an appeal under s 81(2), the appellant must show that the Board erred in that no reasonable body of members constituting an Income Tax Board of Review could have reached the findings made by the Board (Mount Elizabeth (Pte) Ltd v Comptroller of Income Tax [1985–1986] SLR(R) 950 at [17]). These are all encapsulated within the oft-quoted statement of the law by Lord Radcliffe in Edwards (Inspector of Taxes) v Bairstow and another [1956] AC 14 where his Lordship held as follows (at 36):
[57] With these principles in mind, I now turn to the Decision to see whether the Board has erred in law or made findings that no reasonable Board could have reached.
Whether the Board adopted the right approach towards s 33
[58] The Board in its Decision held that the Financing Arrangement had the purpose or effect of tax avoidance within the realm of s 33(1). In arriving at this conclusion, the Board found that the arrangement was contrived and artificial or was structured in a contrived and artificial way in order for the Appellant to obtain a refund of tax through the utilisation of tax credits, and also that the arrangement was not carried out for bona fide commercial reasons but had, as one of its main purposes, the avoidance or reduction of tax. The Board focused on and emphasised the point that the Financing Arrangement was artificial and contrived and lacked commercial justification.
[59] Counsel for the Appellant argues that the Board adopted the wrong approach. He points out that there are two main parts to s 33. The first comprises the “three limbs” of s 33(1), which spell out the section’s scope of application. The second part is the statutory exception in s 33(3)(b), which is applicable only where it is found that s 33(1) has been triggered. The correct approach is to first determine whether the arrangement falls within one or more of the three limbs of s 33(1). It is only when the arrangement falls within one or more of the three limbs that the question arises as to whether the statutory exception in s 33(3)(b) applies. The Board hence adopted the wrong approach. In determining whether the Financing Arrangement had as one of its main purposes tax avoidance or reduction, the Board erroneously conflated ss 33(1) and 33(3)(b).
[60] Counsel for the Comptroller argues in reply that the Board has not adopted the wrong approach. In counsel’s view, the Board was perfectly justified in taking into consideration artificiality and contrivance as factors in determining whether s 33(1) applied because it is consistent with Parliament’s intention. Counsel referred to statements made by the Minister for Finance in his speech at the Second Reading of the Income Tax (Amendment) Bill 1988 (“the Second Reading”) which suggest that artificiality and contrivance remain factors to be considered in applying s 33(1).
[61] I agree with counsel for the Appellant on this point.
[62] Section 33 of the Act provides as follows:
[63] Tax law is a creature of statute and interpretation of particular tax provisions must start from their express words: JD Ltd v Comptroller of Income Tax [2006] 1 SLR(R) 484 at [46] and [56] (“JD Ltd”). Looking squarely at the express words of s 33, one would notice that there is a clear two-part structure to s 33:
(a) Section 33(1) sets out three specific circumstances, at least one of which must be fulfilled before the Comptroller may exercise his powers under s 33(1). The purpose or effect of the arrangement in question must be to:
(i) alter the incidence of any tax which is payable by or which would otherwise have been payable by any person;
(ii) relieve any person from any liability to pay tax or to make a return under the Act; or
(iii) reduce or avoid any liability imposed or which would otherwise have been imposed on any person by the Act.
(b) Section 33(3) sets out the two situations where s 33 cannot be applied. These are:
(i) where the arrangement in question was made or entered into before 29 January 1988; and
(ii) where the same was carried out for bona fide commercial reasons and had not, as one of its main purposes, the avoidance or reduction of tax.
[64] Hence, the proper approach towards applying s 33 is as follows:
(a) The Comptroller must first determine whether the arrangement in question falls within any of the three limbs in s 33(1).
(b) If the arrangement does not fall within any of the three limbs in s 33(1), the Comptroller cannot exercise his powers thereunder.
(c) If the arrangement does fall within any of the three limbs in s 33(1), it must further be determined whether either of the two statutory exceptions in s 33(3) applies to the arrangement in question.
(d) If either of the statutory exceptions applies to the arrangement in question, the Comptroller may not exercise his powers under s 33(1).
(e) Conversely, if neither of the statutory exceptions applies, the Comptroller may exercise his powers under s 33(1).
[65] With respect, it would appear that the Board adopted the wrong approach. The Board seemed to have conflated the statutory exception under s 33(3)(b) with the elements of s 33(1). The Board should not have delved straight into asking whether the Financing Arrangement was artificial and contrived before considering whether any of the three limbs in s 33(1) was satisfied. This is not to say that it was altogether irrelevant to consider whether the Financing Arrangement was artificial or contrived, but merely that such consideration should have taken place only at the second stage when the question being considered was whether the statutory exception in s 33(3)(b) applied.
[66] The previous incarnation of s 33(1) expressly included artificiality and fictitiousness as elements to be considered. The previous s 33 of the Income Tax Act (Cap 134, 1985 Rev Ed) provided as follows:
The present s 33 of the Act makes no specific reference to these elements. Counsel for the Comptroller points to a part of the Minister for Finance’s speech at the Second Reading (which introduced the present s 33) in which the Minister said (Singapore Parliamentary Debates, Official Report (13 January 1988) vol 50 at col 358):
On the basis of these statements, counsel argues that the Board was right to consider artificiality and contrivance as relevant factors in determining whether s 33(1) applied. I disagree. As I have stated, these factors are relevant only at the second stage when the enquiry is whether the statutory exception in s 33(3)(b) applies. Under the broader enquiry in s 33(3)(b) as to whether an arrangement was carried out for “bona fide commercial reasons”, it is not irrelevant to ask whether it was “artificial”, “fictitious” or “contrived”. What the re-enactment of s 33 did was to do away with the need for the Comptroller to find that an arrangement was artificial or fictitious (or that any disposition was not in fact given effect to) in favour of a broader test, viz, whether 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.
[67] It must be noted that even if the Board has adopted the wrong approach, it may be that the Board’s ultimate conclusion that s 33 was properly invoked is correct. In this respect, to succeed in its appeal, the Appellant must not only show that the Board adopted the wrong approach, but also that applying the right approach, s 33 would not apply on the facts of this case.
[68] Hence, I must further consider whether on the proper application of s 33 to the facts of this case, the Comptroller was ultimately justified in exercising its powers under s 33(1) in the manner that he did.
Whether the Financing Arrangement fell within sub-paras (a), (b) or (c) of s 33(1)
Interpreting s 33(1) – relevant principles
[69] Before the Comptroller may exercise his powers under s 33(1), he must be satisfied that the “purpose or effect” of the Financing Arrangement is to achieve any of the three consequences set out in sub-paras (a), (b) and (c) of s 33(1).
[70] At the Second Reading, the Minister for Finance stated that s 33 was similar to the Australian and New Zealand anti-avoidance provisions and that Australian and New Zealand case law interpreting those provisions might be useful in interpreting our own s 33 (Singapore Parliamentary Debates, Official Report (13 January 1988) vol 50 at cols 365–366):
[71] In the leading case of Lauri Joseph Newton and Ors v Commissioner of Taxation of the Commonwealth of Australia [1958] 1 AC 450 (“Newton”), the Privy Council interpreted the phrase “purpose or effect” in s 240 of the Income Tax and Social Services Contribution Assessment Act, 1936–1951 (Cth), which was the Australian anti-avoidance provision then in force. Lord Denning opined (at 465–466):
[72] Lord Denning’s approach in Newton has since become known as the “predication principle”. It requires the court to objectively determine the tax avoidance purpose or effect of the arrangement in question with reference to the terms of the arrangement and the manner in which it was implemented. The motives of the parties to the arrangement are irrelevant. The objective effect of the arrangement is paramount.
[73] The Privy Council in Sidney Boyd Ashton and another v Inland Revenue Commissioner [1975] 1 WLR 1615 (“Ashton”) applied the predication principle in relation to s 108 of the Land and Income Tax Act 1954 (New Zealand), which was the previous anti-avoidance provision then in force in New Zealand and had the same words “purpose or effect” as s 33. Viscount Dilhorne said (at 1621):
Hence, “purpose” and “effect” are treated as synonymous. Academic commentators have acknowledged that the courts have interpreted these words synonymously: see, eg, John H Telfer, “General Anti-Tax Avoidance Provisions: the Singapore Position and Australasian Comparisons” (1990) 32 Mal L R 311 (“Telfer”) at pp 314–315. The chief focus is on the objective effect of the arrangement in question.
[74] The predication principle has since been applied in Australia in relation to the subsequent Australian anti-avoidance provisions broadly similar to s 33 which had the same words “purpose or effect”: see, eg, Mobil Oil Australia Ltd v Commissioner of Taxation of the Commonwealth of Australia [1966] AC 275 (“Mobil Oil”); George Hancock v Federal Commissioner of Taxation (1959–1961) 108 CLR 258; and Peate v The Commissioner of Taxation of the Commonwealth of Australia [1962–1964] 111 CLR 443 (“Peate”). For example, in Mobil Oil, the provision in question was s 260 of the Income Tax and Social Services Contribution Assessment Act, 1936–1960 (Cth), which was quoted as follows (at 292):
The same provision was interpreted and applied in Peate.
[75] The predication principle has also been applied in New Zealand in relation to provisions that had the same words “purpose or effect” and were also broadly similar to s 33: see, eg, Ashton; Owen Thomas Mangin v Inland Revenue Commissioner [1971] AC 739; and Europa Oil (NZ) Ltd v Inland Revenue Commissioner [1976] 1 WLR 464 (“Europa Oil”). For example, the provision in Ashton, namely, s 108 of the Land and Income Tax Act 1954 (New Zealand), is as follows:
The same section after amendment was considered in Europa Oil and is as follows:
[76] In my view, the predication principle should similarly apply to s 33(1) of the Act. At any rate, the phrase “purpose or effect” in s 33 itself suggests that an objective approach is required.
[77] Hence, before the Comptroller may exercise his powers under s 33(1), he must be satisfied that the purpose or effect of the arrangement in question is one or more of the three consequences set out in sub-paras (a), (b) and (c) of s 33(1). He reaches this conclusion through an examination of the terms of the arrangement and the manner in which it is implemented, without reference to the motives of the parties involved.
Application
[78] Applying the approach above, does the Financing Arrangement fall within any of the three limbs of s 33(1)? To succeed, the Comptroller must be able to predicate, by looking at the overt acts in the Financing Arrangement, that it was implemented in that particular way so as to achieve one or more of the three consequences set out in sub-paras (a), (b) and (c) of s 33(1), viz:
[79] Naturally, counsel for the Appellant argues that the Financing Arrangement does not fall within any of the three limbs of s 33(1). His arguments are as follows. Section 33(1) requires that there be a liability to pay tax. This must refer to the final amount computed to be payable to the Comptroller after setting off the relevant s 44 tax credits against the tax payable on the dividend income. On the facts, the final tax payable is precisely zero, which means that there was no liability to pay tax within the meaning of s 33(1) in the first place. As such, s 33 cannot apply to the Financing Arrangement. Counsel for the Appellant relied on the cases of Rowdell Pty Limited v The Commissioner of Taxation [1962–1963] 111 CLR 106 (“Rowdell”) and The Commissioner of Taxation of the Commonwealth of Australia v Patcorp Investments Limited [1976] 140 CLR 247 (“Patcorp”) to show that there is no tax liability on the dividend income for the purposes of applying s 33(1). According to counsel, the position he advocates is also consistent with principle. Under the full imputation system, the tax on dividend income is already prepaid by the company which pays out the dividends and is deemed to have been paid by the shareholder receiving the dividends, such that there is no further tax payable on the dividend income. Here, tax on the dividend income received by the Appellant from the Subsidiaries has already been paid by the Subsidiaries, and there is no tax payable by the Appellant on the dividend income.
[80] Counsel for the Comptroller on the other hand argues that all three limbs of s 33(1) are satisfied on the facts. There was tax liability on the dividend income pursuant to s 10(1)(d) of the Act. Section 46(1)(a) makes it clear that the dividend income must be chargeable to tax before the tax credits under the full imputation system may be set off against the tax charged on the dividend income. The Financing Arrangement involved the Appellant borrowing from [N Bank Singapore]. The Appellant incurred interest expenses which were claimed as deductions to reduce the tax liability on its dividend income. As such, all three limbs of s 33(1) were satisfied as the incidence of tax payable by the Appellant on its dividend income was altered, the Appellant was relieved from liability to pay tax on its dividend income and the Appellant reduced or avoided tax liability imposed on its dividend income.
[81] In my view, the Comptroller was not wrong in determining that the Financing Arrangement fell within s 33(1), at least where s 33(1)(c) is concerned.
[82] Section 33(1)(c) applies where the purpose or effect of the arrangement in question is “to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this Act”. These are words of wide import, applying even where there is no pre-existing liability to pay tax. It was noted in Tan Wee Liang, “Tax Avoidance and Section 33 of the Income Tax Act” (1989) Mal L R 78 at p 93 that the words of the section “pre-empt any argument that an arrangement is only caught under the section where the arrangement avoids or displaces an existing tax liability”. Such an argument was considered in Newton.
[83] The Privy Council in Newton interpreted the words “liability imposed on any person” and “avoiding” in s 260(c) of the Commonwealth of Australia Income Tax and Social Services Contribution Assessment Act, 1936–1951 (Cth). Counsel for the taxpayer, Sir Garfield Barwick, argued that the words “liability imposed on any person” meant a liability which had already accrued and the word “avoid” meant displace, and submitted that in order for an arrangement to be impugned under s 260(c), it had to be an arrangement which sought to displace a liability which had already come home to a taxpayer in respect of income which had already been derived by him. The Privy Council rejected the submission. Lord Denning said (at 464):
The words “any liability … which would otherwise have been imposed” in s 33(1)(c) similarly preclude the sort of argument raised by Sir Garfield Barwick in Newton. Hence, s 33(1)(c) applies where an arrangement has the purpose or effect of reducing or avoiding any liability which is already accrued, yet to accrue, or would have accrued but for the arrangement.
[84] Counsel for the Appellant submits that there was no relevant tax liability for the purposes of s 33(1) because of the way the full imputation system works (see above at [79]). In counsel’s view, under the full imputation system, the shareholder who receives franked dividends is not liable to pay tax on the dividend income because the tax payable on the dividend income is already prepaid by the company which pays out the franked dividends and is hence deemed to have been paid by the shareholder. Hence, counsel concludes that the Appellant was not liable in the first place to pay tax on the dividend income generated by its receipt of the franked dividends.
[85] With respect, counsel’s view on this point is a distortion of the full imputation system and the tax collection process. Under the full imputation system, what was initially collected as tax from the company franking the dividends was not a tax on dividend income eventually declared and paid out to the shareholder, but rather tax on the company’s corporate profits. This tax collected was then credited to the company’s s 44 account as a tax credit. When the company eventually declared and franked dividends payable to the shareholder, the dividend income in the hands of the shareholder first became chargeable to tax. It was only after the dividend income had been charged to tax that, for collection purposes, the s 44 tax credits were set off against the tax charged on the dividend income. An examination of s 46(1) of the Act will bear this out.
[86] Hence, applying the proper approach set out in the preceding paragraph, the correct reasoning and conclusion must be as follows. The Appellant was paid franked dividends by the Subsidiaries. Pursuant to s 10(1)(d), income tax was payable in respect of the dividend income received by the Appellant, less allowable deductions and allowances (if any). Hence, contrary to what counsel for the Appellant submits (see above at [79]), there was relevant tax liability for the purposes of s 33(1). It is only after tax has first been charged on the dividend income that s 46(1)(a) enables the Appellant to set off the s 44 tax credits against the income tax payable on the dividend income. The Appellant paid interest to [N Bank Singapore] in respect of the Notes issued pursuant to the Financing Arrangement. The interest expenses are claimed by the Appellant as deductions pursuant to s 14(1)(a)(i) against its dividend income. Without the interest expenses, the whole dividend income would be subject to tax. With the interest expenses, the dividend income less the interest expenses is subject to tax, so that the amount of tax charged is lower. As such, by generating interest expenses which are claimed as deductions against dividend income, the Financing Arrangement had the purpose and effect of reducing or avoiding a liability imposed by the Act, namely, the total tax chargeable on the dividend income. Without the interest expenses, there would have been more tax charged on the dividend income.
[87] In the light of the above, I am not inclined to follow Rowdell and Patcorp. The Court of Appeal in JD Ltd at [32] has cautioned against reliance on foreign decisions in interpreting local tax statutes and suggested that such reliance is appropriate only where the corresponding foreign tax statutes are identical or very similar. Both Rowdell and Patcorp involved Australian statutory provisions providing for tax rebates on dividends which have no direct local equivalent. While the broad mechanics of the dividend rebate system under s 46 of the Income Tax Assessment Act 1936 (Cth) (“ITAA”) in Rowdell and Patcorp and the franking dividend system under s 44 of the Act are similar, the express words and structure of s 46 of the ITAA and s 44 of the Act are totally different. At best, the reasoning in Rowdell and Patcorp only supports the Appellant’s entitlement to the franked dividends and the accompanying tax credits; it does not support the legitimacy of the Financing Arrangement. The courts in both cases did not have to engage in the application of s 260 of the ITAA with much rigour or depth, but instead focused on the proper scope and application of the other Australian statutory provisions relating to tax rebates. Importantly, the courts in both cases did not explicitly consider whether the transactions in question fell within any of the limbs of s 260(1) of the ITAA, which is the issue here in the context of s 33(1). The courts did not interpret any of the limbs of s 260(1) of the ITAA. At any rate, the facts of Rowdell and Patcorp are distinguishable from the facts of the present case.
[88] Quite apart from reducing the total tax chargeable on the dividend income of the Appellant by incurring interest expenses, the Financing Arrangement also had the effect of avoiding another liability that would have been imposed but for the Financing Arrangement: namely, the liability of [C] to bear withholding tax for the interest payments that it received.
[89] [C] is a non-resident company based in Malaysia. Interest that is earned by [C] under any loan provided by [C] to a person resident in Singapore (eg, the Appellant) would be Singapore-sourced income. Pursuant to s 10(1)(d) read with s 12(6) of the Act, tax is payable in respect of such interest income. The withholding tax provision under s 45 facilitates the collection of tax payable from non-residents on their Singapore-sourced interest income. Hence, pursuant to s 45, any person resident in Singapore who is liable to pay [C] any interest that is chargeable to tax (eg, under loans made by [C] to that person) would have to deduct withholding tax at the prevailing rates from the interest payable to [C] and pass that withholding tax over to the Comptroller.
[90] Under the Financing Arrangement, [N Bank Singapore] subscribed for the Notes from the Appellant. [N Bank Singapore] then detached the Interest Coupons and sold the Principal Notes and paid interest under CPO1 to [N Bank Mauritius], after receiving interest payments from the Appellant under the Interest Coupons. [N Bank Mauritius] in turn sold the Principal Notes and paid interest under CPO2 to [C]. Ultimately, [C] bought the Principal Notes and received the interest payable under CPO2. However, since the payor of the interest was [N Bank Mauritius] and not a person resident in Singapore, s 45 of the Act did not apply; no withholding tax was ever deducted from the interest paid in a chain from the Appellant to [C] through [N Bank Singapore] and [N Bank Mauritius]. The key steps in the Financing Arrangement which allowed [C] to avoid liability to pay withholding tax were the detachment of the Interest Coupons from the Notes, the interposition of [N Bank Singapore] and [N Bank Mauritius] in the chain of interest payments and the use of CPO1 and CPO2.
[91] Counsel for the Appellant strenuously emphasises that the splitting of interest and principal on debt “has long been a normal aspect of commercial financing transactions”, citing the Canadian Federal Court of Appeal’s observation in Lehigh Cement Limited v Her Majesty The Queen [2010] FCA 124 at [30]. While I accept this general proposition, I am unable to agree with counsel’s conclusion that the splitting of the interest and principal on the debt in the present case is fully legitimate and did not constitute tax avoidance. The fact is that the detachment of the Interest Coupons from the Notes allowed [C] to avoid withholding tax. If [N Bank Singapore] subscribed for the Notes but the Interest Coupons were not detached from the Notes before the Notes were sold onwards from [N Bank Singapore] to [C] through [N Bank Mauritius], the Appellant would have had to deduct withholding tax from the interest it had to pay under the Interest Coupons to [C]. Alternatively, if [C] had directly subscribed for the Notes from the Appellant, the Appellant would also have had to deduct withholding tax from the interest that it would have to pay to [C] under the Interest Coupons. The withholding tax so deducted would have been payable to the Comptroller. Hence, by interposing [N Bank Singapore] and [N Bank Mauritius], the Financing Arrangement had the effect of enabling [C] to receive the full interest payments without being liable to pay withholding tax at all.
[92] Given that I find that the Financing Arrangement falls within s 33(1)(c), there is no need to determine whether ss 33(1)(a) and (1)(b) applied on the facts and I express no opinion on the same.
Whether the Financing Arrangement fell within the statutory exception under s 33(3)(b)
Interpreting s 33(3)(b) – relevant principles
[93] To avail itself of the statutory exception under s 33(3)(b), the Appellant must show that the Financing Arrangement was “carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax”.
[94] From a plain reading of s 33(3)(b), it is clear that the taxpayer seeking to avail itself of s 33(3)(b) bears the onus of proving two elements. Firstly, it must prove that the arrangement in question was carried out for bona fide commercial reasons. Secondly, it must prove that the same arrangement had not as one of its main purposes the avoidance or reduction of tax.
[95] Counsel for the Appellant argues that the first element is concerned with the subjective reasons of the taxpayer for entering into and carrying out the arrangement in question and supports his arguments by referring to various English cases that I will consider later in this judgment. In contrast, counsel for the Comptroller argues that both elements must be interpreted as importing objective tests such that the subjective motivations of the taxpayer are irrelevant. He rejects the suggestion that the first and second elements should be interpreted as subjective and objective respectively on the ground that it is difficult to read s 33(3)(b) as such and reconcile the subjective first element with the objective second element.
[96] In determining the proper interpretation of s 33(3)(b), one must start from the plain and ordinary meaning of the words of s 33(3)(b). The first element refers to “bona fide commercial reasons”. The word “reasons” is used, not “purpose” or “effect” as in s 33(1) which have already been interpreted to import an objective test (see above at [71]–[76]). The phrase “bona fide” is a Latin expression meaning “good faith” or “honest intention”. Hence, the prima facie conclusion derived from a plain reading and construal of the ordinary meaning of the phrase “bona fide commercial reasons” must be that the taxpayer’s subjective reasons are considered under the first element. With regard to the second element, the word “purpose” by itself prima facie suggests that an objective approach should be adopted.
[97] Turning to the relevant foreign authorities, it should be noted that the Australian and New Zealand anti-avoidance provisions do not have statutory exceptions similar to s 33(3)(b).
[98] However, s 33(3)(b) bears a resemblance to s 28 of the United Kingdom’s Finance Act 1960 (c 44) (UK) (“the Finance Act 1960”), the relevant part of which is as follows:
[99] The House of Lords in Inland Revenue Commissioners v Brebner [1967] 2 AC 18 (“Brebner”) interpreted and applied that provision. In Brebner, the taxpayer was a director of a company which had been supplying coal to trawlers at appropriate discounts for many years. An offer was made to acquire the shares of the company. The taxpayer and five other shareholders outbid the offer because they were interested in keeping the company under their control as it supplied coal to their trawlers at discounted prices which discount would cease if they lost that control. Their offer was accepted by the majority of the company’s shareholders and, by borrowing money from a bank, the six of them carried through the purchase. Subsequently, the company’s capital was reduced by making capital repayments to the taxpayer and the five shareholders who used these capital repayments to repay in part the loan from the bank. The cash thus extracted from the company was not liable to tax. A notice under s 28 of the Finance Act 1960 was served on the taxpayer and the five shareholders. In reaching their conclusion that the transaction was carried out for bona fide commercial reasons and did not have as one of its main objects the obtaining of tax advantages, the House of Lords construed the word “object” in s 28(1) of the Finance Act 1960. Lord Pearce said (at 27):
This dictum of Lord Pearce was subsequently applied by Goff J in Addy v Commissioners of Inland Revenue 51 TC 71 at 81 and Fox J in Clark v Inland Revenue Commissioners [1979] 1 All ER 385 at 395 (“Clark”).
[100] Lord Upjohn said in Brebner (at 30):
[101] Fox J made important observations in Clark (at 395):
This was adopted and applied by the Special Commissioner in Trevor G Lloyd v Revenue and Customs Commissioners [2008] STC 681, who observed (at [7]):
[102] In the light of the above, I am of the view that s 33(3)(b) of the Act should be interpreted as importing a subjective test which requires an inquiry into the subjective reasons of the taxpayer for carrying out the arrangement in question. I appreciate that the particular provisions interpreted and applied in the English cases cited above are not identical to s 33(3)(b) even though they are broadly similar, and, in fact, the word “object” is used in s 28 of the Finance Act 1960 instead of the word “purpose” which is used in s 33(3)(b). Nevertheless, the English cases are helpful in that the adoption of their approach would advance what I consider to be the purpose of the local provision.
[103] In my view, the above interpretation of s 33(3)(b) is consistent with both Parliament’s intention and the structure and intended operation of s 33. At the Second Reading, the Minister for Finance repeatedly emphasised that s 33 is intended to only catch deliberate and blatant tax avoidance arrangements and is not meant to affect normal legitimate commercial transactions (Singapore Parliamentary Debates, Official Report (13 January 1988) vol 50 at cols 357–359 and 365–366):
As shown above, the Minister’s concern was that s 33 might impugn legitimate and normal commercial transactions. This supports a subjective approach towards s 33(3)(b).
[104] Looking at the structure of s 33, it is clear that s 33(3)(b) was meant to be a statutory exception and a counterweight to the potentially wide-ranging application of s 33(1), which has already been interpreted to import a purely objective test (see above at [76]). If full effect is to be given to s 33(3)(b) as a statutory exception against the potential overreach of s 33(1), s 33(3)(b) should be interpreted as importing a subjective test. I believe that this interpretation of s 33 strikes a proper balance between the rights and concerns of taxpayers and the Comptroller.
[105] To summarise, a taxpayer seeking to avail itself of the statutory exception under s 33(3)(b) must prove two elements. Firstly, it must prove that the arrangement in question was carried out for bona fide commercial reasons. The taxpayer’s reasons for carrying out the arrangement is a subjective matter of fact that is determined by drawing the appropriate inferences and reaching the appropriate conclusion after considering all the relevant evidence, which includes but is not limited to the relevant contemporaneous documents, the manner in which the arrangement was carried out and the testimonies of the relevant witnesses on the stand. Secondly, it must prove that the same arrangement had not as one of its main purposes the avoidance or reduction of tax. Whether any of the main purposes of the arrangement was to avoid or reduce tax is a subjective matter of intention to be determined after a consideration of all the relevant evidence, which includes but is not limited to those examples cited earlier. For both elements, all the relevant circumstances of the case are considered, and the arrangement is considered in the context of those circumstances. For example, the testimony of a witness might be that the arrangement in question was carried out for bona fide commercial reasons and not for the purpose of avoiding or reducing tax, but the manner in which the arrangement was carried out and the contemporaneous documents for the various transactions within the arrangement might lead one to disbelieve the witness and reach the opposite conclusion. Everything depends on a holistic evaluation of all the relevant evidence.
[106] I now turn to apply these principles to the present case.
Whether the Financing Arrangement was carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax
[107] The Appellant’s position is that the Board failed to give the appropriate weight to the evidence before it, which clearly supported the view that the Financing Agreement was carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax. Counsel for the Comptroller argues conversely that the Board had more than sufficient evidence to reach its finding that the Financing Arrangement was not carried out for bona fide commercial reasons and had as one of its main purposes the avoidance or reduction of tax.
[108] The Board concluded that the Financing Arrangement was “artificial” and “contrived” and was not carried out for bona fide commercial reasons and had as one of its main purposes the avoidance or reduction of tax. It did so on the basis of a different interpretation of s 33(3)(b). It seems that the Board interpreted s 33(3)(b) as importing a fully objective test (see the Decision at [96]–[99]), in contrast to the proper approach canvassed above. That being the case, I need to consider whether, on a proper interpretation and application of s 33(3)(b), the evidence before the Board nevertheless leads to the reasonable conclusion that the Financing Arrangement was carried out for bona fide commercial reasons and did not have as one of its main purposes the avoidance or reduction of tax.
[109] The affidavit and testimony of [L], the chief financial officer and a director of [B], the holding company of the Appellant, must be the starting point as they are crucial in determining whether the Appellant carried out the Financing Arrangement for bona fide commercial reasons and not with a main purpose of avoiding or reducing tax.
[110] Counsel for the Appellant points outrepeatedly that [L] stated in his affidavit that the primary purpose of consolidating the Subsidiaries under the Appellant was to restructure and streamline the previously cumbersome holding structure for the Subsidiaries, so as to reduce operational inefficiencies, reorganise the Subsidiaries according to their lines of businesses and let the Subsidiaries avail themselves of group relief. Counsel also referred to [L’s] testimony on the stand that the previous group structure was cumbersome in that, for example, [F], [G] and [H] had to pay one Singapore company and one Malaysian company whenever they decided to pay dividends. Counsel also referred to the announcement made by [B] to the Kuala Lumpur Stock Exchange where the same was said regarding the purpose of the restructuring, namely, that it was to put in place a simpler corporate structure and allow the Subsidiaries to obtain group relief. On this basis, counsel argues that the Board was wrong to conclude that the Financing Arrangement was not carried out for bona fide commercial reasons on the evidence adduced.
[111] I am unable to agree with counsel. The evidence referred to by counsel only serves to prove what is not in dispute: namely, that the restructuring of the [B] group was done for bona fide commercial reasons, which include streamlining the corporate structure and taking advantage of group relief. There is nothing wrong per se with the restructuring. The Board itself noted the legitimacy of the restructuring in its Decision at [104]. Indeed, the Comptroller does not and cannot dispute this. What the Comptroller sought to impugn was the Financing Arrangement, which involves [N Bank Singapore] and [N Bank Mauritius] in the restructuring. The Financing Arrangement is separable from the restructuring exercise of the [B] group. It would be wrong to conflate both of them and attribute the bona fide commercial reasons for the latter to the former. It must be noted that the evidence referred to by counsel does not prove that the Financing Arrangement, as distinct from the restructuring of the [B] group itself, was done for bona fide commercial reasons. Counsel for the Appellant has failed to prove that the Financing Arrangement was carried out for bona fide commercial reasons.
[112] In this regard, counsel for the Comptroller refers to various parts of [L’s] testimony on the stand which, I agree, show that the Appellant did not carry out the Financing Arrangement for bona fide commercial reasons.
[113] [L] stated in his affidavit that the [B] group already had the money to buy back their own “bonds”, (ie, the Notes issued by the Appellant to [N Bank Singapore]). Under cross-examination, [L] confirmed that the group was capable of financing the restructuring and it was not necessary to involve [N Bank Singapore] and [N Bank Mauritius] in the restructuring through the Financing Arrangement:
[114] As suggested in the excerpt set out immediately above, [L] had previously testified during his examination-in-chief that there were three objectives in carrying out the restructuring and the Financing Arrangement, namely:
(a) to simplify the corporate structure;
(b) to claim group tax relief; and
(c) to have the “tax assets” residing in the Subsidiaries returned to [B].
When further questioned by the Chairperson of the Board, [L] actually admitted that [N Bank] was involved in the restructuring mainly to achieve the third objective, ie, to return the “tax assets” represented by the tax credits in the s 44 accounts of the Subsidiaries to their ultimate holding company, [B]:
[115] Counsel for the Appellant argues that counsel for the Comptroller took [L’s] evidence in the above excerpt out of context and was wrong to say that [L] had admitted that the Financing Arrangement was entered to avoid or reduce tax when in fact, in the opinion of counsel, the excerpt merely confirms [N Bank Singapore’s] role, which was to lend the funds needed for the Appellant to acquire all the Subsidiaries and a consequence of this lending was the incurring of interest expenses which could be set off against the dividend income. I am unable to accept counsel’s interpretation of the evidence here. It is clear from the excerpt above that the Chairperson was focusing on whether the main objective of the Financing Agreement was for the extraction of the tax credits in the Subsidiaries’ s 44 accounts. In response, [L] admitted in no uncertain terms that the main objective of the Financing Arrangement was indeed to extract the tax credits in the Subsidiaries’ s 44 accounts.
[116] Counsel for the Appellant also points to various parts of [L’s] evidence which suggest that the restructuring would have taken place anyway regardless of the changes to the tax regime in Singapore through the introduction of group relief and the transition from the full imputation system to the one-tier corporate tax system. [L] did state the same in his affidavit, cross-examination and re-examination. However, once again, this evidence only shows that the restructuring might not have been done solely because of the need to obtain group tax relief and tax benefits under the full imputation system, and can shed little if any light on the reasons underlying the Financing Arrangement (in this regard, see also above at [111]). I am unable to appreciate the significance of this evidence in determining whether the Financing Arrangement was entered into for bona fide commercial reasons.

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AQQ v Comptroller of Income Tax

Laws this judgment relies on

Grounds of decision

Introduction

The facts

The Appellant

Background to the dispute

Before the restructuring exercise

Restructuring in 2003

The financing arrangement

Dividends and changes to the tax regime

The tax dispute

Decision of the Board

The Appellant’s case

The Comptroller’s case

Issues

Approach towards appeals against decisions of the Board

Whether the Board adopted the right approach towards s 33

Whether the Financing Arrangement fell within sub-paras (a), (b) or (c) of s 33(1)

Interpreting s 33(1) – relevant principles

Application

Whether the Financing Arrangement fell within the statutory exception under s 33(3)(b)

Interpreting s 33(3)(b) – relevant principles