Singapore’s general anti-avoidance rules (GAAR) are found in section 33 of the Income Tax Act. Until recently, there was only one income tax case, Comptroller of Income Tax v AQQ and another appeal  SGCA 15 (“AQQ”) dealing with the application of this section. It is therefore not surprising that the Inland Revenue Authority of Singapore (IRAS), in its guidelines issued on 11 July 2016 on the application of the GAAR, adopts an approach based on the principles enunciated by the Court of Appeal (CA) in AQQ. Given today’s international fiscal environment, the IRAS’s guidelines on tax avoidance serve to reinforce Singapore’s stance against abusive arrangements and its reputation as a substantive business hub.
Singapore’s GAAR are found in section 33 of the Income Tax Act and have been in place in their present form since 1988. Similar provisions exist in the Goods and Services Tax Act and the Stamp Duties Act.
To-date, there are two income tax cases dealing with the application of this section – AQQ and the recently published Board of Review’s decision of GBF v The Comptroller of Income Tax  SGITBR 1 (“GBF”). Additionally there are two stamp duty cases, UOL Development (Novena) Pte Ltd v Commissioner of Stamp Duties  SGHC 173 and Lai Ling Wan (alias Lai Lily) v Commissioner of Stamp Duties  SGHC 186, dealing with the equivalent GAAR in section 33A of the Stamp Duties Act.
It is therefore not surprising that the IRAS, in an e-Tax Guide entitled “Income Tax: The General Anti-avoidance Provision and its Application (First Edition)” issued on 11 July 2016 (the “Guide”), adopts an approach based on the principles enunciated by the Court in AQQ.
Heightened international attention on the tax affairs of corporates worldwide in recent years, in particular with the launch of the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project in February 2013, has led many governments around the world to relook the adequacy of their domestic GAAR in countering overly aggressive tax structures. Arrangements which have been put in place based on the rules prevailing in the past will increasingly be scrutinised in the light of the current environment. The issuance of the guidelines by IRAS is thus a timely move. Singapore has repeatedly indicated its support for the OECD’s BEPS initiative, and its stance on the GAAR as elaborated in these guidelines reinforces its reputation as a substantive business hub.
The IRAS e-Tax Guide
The Guide sets out the IRAS’s approach to the interpretation and application of the GAAR and provides some examples of arrangements, which in its view, have the purpose or effect of tax avoidance. The Guide also clarifies what the GAAR does not target, namely, the tax consequences of genuine commercial transactions.
Arrangements that form the subject of specific anti-avoidance provisions in the Income Tax Act and those that involve tax evasion do not fall within the scope of the Guide.
Whilst the Guide provides a number of examples on what the IRAS would consider as constituting tax avoidance, it makes clear that such examples are not intended to be comprehensive and that arrangements not included in the Guide should not be taken as falling outside the ambit of GAAR, and therefore acceptable to the Comptroller of Income Tax (CIT).
The Guide provides examples of arrangements that the IRAS would regard as having the purpose or effect of tax avoidance within the meaning of section 33(1) of the Income Tax Act. These are classified into the following broad groups:
- Circular flow or round
- Setting up of more than one entity for the sole purpose of obtaining tax advantage
- Changing the business form for sole purpose of obtaining tax benefit
- Attribution of income that is not aligned with economic reality
GBF is the first decision on the application of the anti-avoidance provisions since AQQ. It dealt with an arrangement put in place by the taxpayer, a medical practitioner, pursuant to which his “physician compensation” is paid to a partnership. The partnership’s two partners are companies owned by the taxpayer and his wife respectively. The CIT invoked the anti-avoidance provisions and sought to treat the physician compensation paid to the partnership as income in the hands of the taxpayer, so as to negate the benefits of the start-up tax exemption scheme that would otherwise be available to the corporate partners.
Applying the principles enunciated in AQQ, the Board considered whether the taxpayer could rely on the bona fide commercial purpose test to avail himself of the exception under section 33(3)(b) of the Income Tax Act. In doing so, it evaluated the subjective intentions of the taxpayer by drawing inferences from the surrounding objective evidence and features of the arrangement. Given both the lack of supporting documentation and factual evidence to corroborate the taxpayer’s assertions that the arrangement was meant for bona fide commercial reasons, the Board concluded that one of the main purposes of the arrangement was to avoid tax. The taxpayer’s appeal therefore failed.
What section 33 is not targeted at
Section 33 is aimed at schemes designed to avoid tax and is not intended to interfere with the tax consequences of genuine commercial transactions. The following are provided as examples of such transactions:
- Placement of monies in a local bank or with a bank outside Singapore
- Provision of housing accommodation to employees directly instead of giving a taxable housing allowance
- Non-remittance of foreign income
- Bona fide commercial basis on setting corporate structures
As tax systems and corporate structures around the world are coming under increasingly intense scrutiny, it is timely that the IRAS issues guidance to clarify the application of Singapore’s GAAR provisions.
In doing so, the IRAS has adopted the principles enunciated in AQQ, and provided some examples of the types of arrangements and transactions which the IRAS would and would not be treated as potentially falling within the ambit of GAAR. Given the specific facts pertaining to these examples, their outcomes should not come as a surprise. It should, however, be recognised that whether there is tax avoidance is extremely dependent on the facts of each case, involving an enquiry into the subjective motive of the taxpayer for entering into the arrangement and subjective consequences sought, as well as the manner in which the arrangement is carried out in the light of the specific legislative provision being considered. Both the AQQ and GBF decisions also highlighted the importance of having contemporaneous documentation to corroborate the intent behind any arrangements undertaken.