Income Tax – Application of Anti-Tax Avoidance Rule

On 11 July 2016, the Singapore tax authorities have issued a e-Tax Guide titled Income Tax: The General Anti-avoidance Provision and its Application.  The purpose of this e-Tax Guide is to set out the Comptroller of Income Tax’s (“CIT’s”) approach to interpret the general anti-avoidance provision under Section 33 of the Income Tax Act (“ITA”); and provides some examples which have the purpose of effect of tax avoidance within the meaning of Section 33(1) of the ITA.

CIT’s approach to interpret Section 33 of the ITA

The CIT adopts the scheme and purpose approach for the purpose of interpreting Section 33 of the ITA.  This approach requires taxpayer to address the questions in the following manner:

  1.    Whether an arrangement prima facie falls within any of the three threshold limbs of Section 33(1) such that the taxpayer has derived a tax advantage;
  2. If the answer to Q1 is yes, whether the taxpayer may avail himself of the statutory exception under section 33(3)(b);
  3. If the answer to Q1 is no, whether the taxpayer has satisfied the court that the tax advantage obtained arose from the use of a specific provision in the Act that was within the intended scope and Parliament’s contemplation and purpose, both as a matter of legal form and economic reality within the context of the entire arrangement.

In summary, the CIT has adopted this approach based on the Court of Appeal decision in CIT v AQQ [2014] SGCA 15 (“AQQ Case“)

What happened in the AQQ case is that a Malaysian listed group incorporated AQQ to carry out a restructuring and financing arrangement in 2003.  AQQ acquired 100% shares in four Singapore companies (which have significant amount of dividend franking credits in their accounts) from related companies.  AQQ then financed the purchase of these shares via round-tripping financing arrangements through two banks located in different countries.

The Court of Appeal upheld the decisions of the Income Tax Board of Review and the High Court, and ruled that Section 33 was applicable.  The Court of Appeal held that the restructuring and financing arrangements were not commercial transactions under which any tax avoidance or reduction was merely incidental. It also ruled that one of the main purposes of the restructuring and financing arrangement was to obtain a tax benefit by creating interest deductions to reduce the tax payable on the dividend income.

4 Examples of Tax Avoidance Arrangements

A tax avoidance arrangement in general refers to an arrangement that is artificial, contrived or has little or no commercial substance and is designed to obtain a tax advantage that is not intended by Parliament. In this e-Tax Guide, the Singapore tax authorities have given 4 examples of what they consider arrangements that fall within Section 33 of the ITA.

  • Circular flow or round-tripping of funds;
  • Setting-up of more than one entity for the sole purpose of obtaining tax advantage;
  • Change in business form for the sole purpose of obtaining tax advantage; and
  • Attribution of income that is not aligned with economic reality

Notwithstanding the above, the Singapore tax authorities have stressed that Section 33 is not intended to interfere with the tax consequences of genuine commercial transactions. For example, (i) the placement of monies in a local bank or with a bank outside Singapore, (ii) the provision of housing accommodation to employees directly instead of giving a taxable housing allowance or (iii) the non remittance of foreign income, is not intended to be the subject of the CIT’s exercise of his section 33(1) powers.

CIT’s Power Under Section 33

The CA in the AQQ case confirms that Section 33(1) expressly provides CIT with wide powers, including the power to impose a liability to tax to counteract any tax advantage arising from the impugned arrangement including the following:

  • the tax liability that arises from the inclusion of an income sought to be excluded or the disallowance of a deduction sought to be made;
  • the hypothetical tax liability on the economic and commercial basis of what would likely have happened if the taxpayer had not entered into the arrangement constituting tax avoidance;
  • the tax liability if the arrangement simply had not taken place.

Taxpayers should thus pay attention and exercise caution when structuring their business transactions to ensure that they fall outside the scope of Section 33 of the ITA.  When in doubt, speak to your Accredited Tax Advisor.

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