Comptroller of Income Tax v AQQ and another appeal [2014] SGCA 15

The Singapore Court of Appeal in Comptroller of Income Tax v AQQ and another appeal found that the Comptroller of Income Tax had acted ultra vires in issuing additional assessments in an attempt to counteract a tax advantage gained by the company at issue through a tax avoidance arrangement. The court also considered if a financing arrangement deployed by a taxpayer was a tax avoidance mechanism within the meaning of section 33(1) of the Income Tax Act.


As a result of a restructuring undertaken by a Malaysian public company ("B"), the taxpayer ("AQQ") at issue here was incorporated in Singapore. AQQ was the holder of all the issued shares in several subsidiaries in Singapore (the "subsidiaries") after issuing convertible notes to a bank (the "Notes"). AQQ entered into a financing arrangement (the "Financing Arrangement") with the bank ("N Bank Singapore") in connection with the acquisition of the subsidiaries. Under the Financing Arrangement, N Bank Singapore subscribed for the Notes from AQQ then detached the interest coupons and sold the principal notes and paid interest to another bank ("N Bank Mauritius") after receiving interest payments from AQQ under the interest coupons. N Bank Mauritius in turn sold the Notes to another company wholly-owned by B ("C"). In order to enable C to pay N Bank Mauritius for the Notes, another of the subsidiaries together with B each made an interest-free inter-company loan of S$75 million to C.

Subsequent to the restructuring, the subsidiaries paid dividends to AQQ and these carried tax credits pursuant to the full imputation system. Prior to1 January 2003, Singapore had in force the full imputation system for taxation of dividends further to section 44 of the Income Tax Act (the "Act"). Under this system, the tax paid on a company's profits was passed to shareholders upon distribution of profits as dividends which are then taxable. The corporate tax paid on the dividends was imputed to the shareholders who were then able to claim a tax credit. On 1 January 2003, the full imputation system was replaced with a one-tier corporate tax system. Companies were given the option to stay on the imputation system for a transitional period ending 31 December 2007, which the subsidiaries here chose to do, paying franked dividends which continued to carry tax credits ("section 44 accounts").

The Financing Arrangement enabled AQQ to acquire the subsidiaries and to receive dividends paid out of the distributable profits of the subsidiaries (the "dividend income") and to claim the interest AQQ paid to N Bank Singapore in relation to the Notes (the "interest") as a deduction against AQQ's dividend income. The interest deductions and dividend income were taken into account in the Comptroller's Notice of Assessment for Years of Assessment ("YA") 2004 to 2006 and AQQ received over S$9 million in tax refunds. However, in 2008 the Comptroller of Income Tax (the "Comptroller") informed AQQ that he was not satisfied that there was commercial justification for the Financing Arrangement and that its main purpose was instead to derive a tax advantage. Invoking section 33 of the Act, the Comptroller revised the earlier assessments to disregard the dividend income and the interest and assessed AQQ to have a total overall net tax liability of over S$9 million for YA 2004 to 2006 (the "Additional Assessments"). The Comptroller similarly disregarded the dividend income and interest AQQ claimed for YA 2007 ("YA 2007 Assessment").

AQQ objected to the Additional Assessments and the YA 2007 Assessment. The Comptroller refused to amend the same and AQQ appealed to the Income Tax Board of Review who upheld the Comptroller's decision finding that the Financing Arrangement had the purpose or effect of tax avoidance within the meaning of section 33(1).

AQQ appealed to the High Court.

Decision of the High Court

The High Court held that the Financing Arrangement constituted tax avoidance under section 33, but that the Comptroller had not exercised his power fairly and reasonably by choosing to disregard both the dividend income and interest expenses under the Additional Assessments for YAs 2004 to 2006 and the Notice of Assessment for YA 2007. The High Court found issuance of the Additional Assessments and the YA 2007 Assessment to have been ultra vires.


Both parties appealed the High Court's decision, with AQQ challenging the finding that the Financing Agreement was a tax avoidance mechanism and the Comptroller challenging the finding that it had acted ultra vires in issuing the Additional Assessments and the YA 2007 Assessment. Both appeals were heard together.

Does the Financing Arrangement constitute tax avoidance?

The Comptroller contended before both the High Court and the Court of Appeal that the Financing Agreement satisfied all the requirements set out to trigger the Comptroller's powers under section 33. The Comptroller's powers to disregard or vary an arrangement under section 33(1) are triggered where the purpose or effect of the arrangement is to alter the incidence of tax, relieve a liability to pay tax or reduce or avoid any liability imposed or would have otherwise been imposed. The court agreed, finding that the words "liability imposed" in section 33 refers to legal liability to tax under any provision of the Act and not whether there is in fact an obligation to pay more tax after the liability has been set off by a corresponding tax credit.

The Comptroller's position was that the generation of interest expenses under the Financing Arrangement had reduced AQQ's tax liability for the dividend income. The Court of Appeal agreed, finding that an objective evaluation of the totality of the arrangement demonstrated that the Financing Arrangement was implemented in a particular manner in order to reduce AQQ's liability for tax on the dividend income.

The court then considered whether the arrangement was carried out for bona fide commercial reasons, thus falling within the statutory exception in section 33(3)(b), though the court cautioned that such an inquiry was necessarily subjective in nature. The court considered that one of the main subjective purposes of the Financing Arrangement was to generate interest expenses on the Notes so as to reduce AQQ's tax liability on the dividend income from the subsidiaries. In coming to this finding, the court noted inter alia that N Bank Singapore and N Bank Mauritius bore only a negligible commercial risk for the purchases of the Notes. The court found that there was no other explanation for the complicated arrangement other than that the round tripping of the purchase price of the subsidiaries and the artificial interposition of the external entities crossed the line between tax efficiency and tax avoidance. Hence, the statutory exception did not apply.

Comptroller's exercise of powers

The court then considered the appropriate standard of review over the Comptroller's exercise of his powers under section 33(1) to "disregard or vary the arrangement and make such adjustments as he considers appropriate ... so as to counteract any tax advantage". The Comptroller submitted that section 33(1) conferred a wide discretion on the Comptroller to decide how he might wish to exercise his powers to counteract the tax advantage and that the court should not impose its own views as to how the Comptroller ought to have exercised his discretion save in exceptional cases. It was contended that the standard grounds for judicial review should instead apply. The Court of Appeal affirmed the standard of review adopted by the High Court in this case, namely that the Comptroller had to exercise his powers in a manner that was "fair and reasonable". The court is therefore entitled to strike down any variations or adjustments made by the Comptroller that are arbitrary or unreasonable as well as any excessive or abusive exercise of discretion that falls outside the scope of the Comptroller's powers under section 33, but the court should not substitute its own preferred method for counteracting a tax advantage.

With regard to the Comptroller's Additional Assessments, the court held that they should not have been conducted where the amount of tax assessed under the Additional Assessments was less than the amount of tax assessed under the original assessments for YA 2004 to 2006. In this matter, there was no shortfall of tax assessed and the Comptroller should not have issued the Additional Assessments. The Court of Appeal therefore allowed the Comptroller to maintain his assessment for YA 2007, but ruled against his issue of the Additional Assessments.


Given the findings above, the court allowed part of the Comptroller's appeal, finding that the issuance of the Notice of Assessment for YA 2007 was valid and therefore dismissed AQQ's appeal. The Additional Assessments for YAs 2004, 2005 and 2006 were ultra vires and the court affirmed the High Court's order setting these aside.