AQQ v Comptroller of Income Tax (2012) SGHC 249
On 18 December 2012, the High Court issued a landmark decision of almost 100 pages on the proper interpretation and application of anti-avoidance provisions in section 33 of the Income Tax Act (ITA).
In 2003, the taxpayer, AQQ, was incorporated in Singapore as part of a corporate group’s restructuring exercise. AQQ was a wholly-owned subsidiary of a Malaysian company, B, listed on the Kuala Lumpur Stock Exchange. AQQ subsequently acquired several subsidiary companies in Singapore after obtaining the funds to do so by issuing convertible notes to a bank. Under the notes, AQQ was to make periodic payments of interest to the bank, a non-resident.
During the relevant years of assessment, the acquired subsidiaries paid out dividends to AQQ which were chargeable to income tax in its hands. The dividends carried tax credits, arising from tax deemed to have been deducted at source, which could be set off against the tax payable by AQQ on its chargeable income. AQQ paid to the bank the various amounts of interest due under the notes. In its corporate tax returns for the relevant years of assessment, AQQ claimed deduction for the interest expenses against the dividend income and also claimed the tax credits under the dividends. The combined effect was that there was not only no tax payable by AQQ but substantial tax refunds were claimed from the Comptroller.
Initially, the Comptroller accepted AQQ’s tax computations filed with its returns, and issued notices of assessment under which AQQ was to receive tax refunds. Subsequently, the Comptroller changed his mind and took the view that AQQ was engaged in a tax avoidance arrangement and purported to exercise his powers under s33(1) of the ITA to disregard both the dividend income and the interest expenses. He then issued notices of additional assessments which effectively took back the tax refunds given earlier.
AQQ appealed to the Income Tax Board of Review which dismissed its appeals. AQQ appealed to the High Court which considered two issues, namely:
- whether the financing arrangement by which AQQ incurred interest expenses which it set off against the dividend income from its subsidiaries constituted tax avoidance within section 33 of the ITA;
- whether the Comptroller was entitled to exercise his powers under s33 of the ITA in the manner he did.
Justice Andrew Ang held that for the Comptroller to succeed, he must show that the financing arrangement by AQQ and its related parties fell within any of the 3 alternative limbs of s33(1), namely that the purpose or effect of the arrangement was:
- to alter the incidence of any tax which is payable by or which would otherwise have been payable by any person;
- to relieve any person from any liability to pay tax or to make a return under the ITA; or
- to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by the ITA.
If the case fell within any such limb, the Comptroller could disregard or vary the arrangement and make such adjustments as he considered appropriate, including the computation or recomputation of gains or profits, or the imposition of liability to tax, so as to counteract any tax advantage obtained or obtainable by AQQ from or under that arrangement. Section 33(3)(b) provided that the section did not apply to “any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax”.
The Court found the Comptroller was not wrong in determining that the financing arrangement fell within s33(1) as least where s33(1)(c) was concerned. However, the Court also found in striking a proper balance between the rights and interests of taxpayers and the Comptroller, that section 33(1) was to be interpreted as importing an objective test, while taxpayers could avail themselves of the statutory exception under s33(3)(b). It decided that the financing arrangement alone offended against s33, so the Comptroller should not have disregarded the dividend income. The Comptroller’s power under s33(1) was to disregard or vary only the impugned arrangement.
On the interest expenses paid to the non-resident bank, Justice Ang found that the Comptroller should not have disregarded them, but instead should have required AQQ to have accounted for withholding taxes on these payments. In the result, the Court found the Comptroller did not exercise his powers under s 33(1) fairly and reasonably when he disregarded both the dividend income and the interest expenses. The Court also questioned the Comptroller’s competence to issue the additional assessments, and found AQQ was entitled to the tax refunds.
As the Comptroller has 30 days to appeal to the Court of Appeal against the High Court’s decision, the final word on this intriguing case may be yet unsaid.