This article is authored by Lam Fong Kiew (Head of Tax, Nexia TS)
On 11th July 2016, the Singapore tax authorities issued an e-Tax guide on the General Anti-avoidance Provision and its application.
The guide essentially sets out the Singapore tax authorities’ approach to the construction and application of the general anti-avoidance provisions promulgated in Section 33 of the Singapore Income Tax Act and illustrates by way of specific examples the types of arrangements that the authorities regard as having the purpose of effecting tax avoidance within the meaning of the Section. The guidelines and accompanying examples in the guide are not meant to be exhaustive.
The examples in the guide focus on certain selected scenarios – circular flow or round-tripping of funds, the setting up of more than one entity for the sole purpose of obtaining a tax advantage, changing business forms for the sole purpose of obtaining a tax advantage and attribution of income that is not aligned with economic reality. Nevertheless, it makes expressly clear that arrangements not discussed or described should not be taken as falling outside the ambit of Section 33. The guide does not cover arrangements that form the subject of specific anti-avoidance provisions in the Singapore Income Tax Act and/or that involve evasion of tax.
Section 33(1) essentially grants powers to the Singapore tax authorities to disregard or vary arrangements that directly or indirectly:
a) Alter the incidence of any tax which is payable by or which would otherwise have been payable by any person;
b) Relieve any person from any liability to pay tax or to make a return; or
c) Reduce or avoid any liability imposed or which would otherwise have been imposed on any person.
In drafting the guide, the Singapore tax authorities have essentially adopted the principles outlined by the case of CIT v AQQ (2014) SGCA 15. Indeed the structure of Section 33 is based on the “scheme and purpose” approach that formed the basis of the Court of Appeal’s ruling in the AQQ case.
The approach can essentially be delineated into three steps. The first step is to essentially establish whether an arrangement falls within any of the three limbs mentioned above. This is an objective test based on the observable acts surrounding the arrangement itself to determine if there has on prima facie been any tax advantage derived.
If so, the second step entails ascertaining whether the taxpayer can avail himself of the statutory exception granted under Section 33(3)(b). This entails considering any subjective commercial motives and consequences that the taxpayer had for entering into such a scheme. In particular, due regard is given by the relevant Section to bona fide commercial transactions which do not have as one of its main purposes the avoidance or reduction of tax.
In the event that the taxpayer cannot seek protection under Section 33(3)(b), the third and final step involves ascertaining whether the tax advantage arose from the use of a specific provision “within the intended scope and Parliament’s contemplation”. In that regard, a general anti-avoidance provision should not be read as “overriding” any specific provision of the legislation or vice versa. Among the factors that should be given consideration in determining whether a tax avoidance arrangement exists include the manner in which the arrangement was carried out, the role of all relevant parties and any relationship they may have with the taxpayer, the economic and commercial effect of documents and transactions, the duration of the engagement and the nature and extent of the financial consequences that the arrangement has for the taxpayer. It is said that a classic indicator of a use that is “outside parliamentary contemplation” is the structuring of an arrangement such that a taxpayer gains the benefit of the specific provision in an artificial or contrived way.
Overall, the guide appears to be an effort by the Singapore tax authorities to communicate their perspective on the construction and application of the anti-avoidance provisions that are already enshrined in the legislation, underpinned firmly by the principles extolled from the AQQ case. The authorities may update the guide with new guidelines and new examples of arrangements, where necessary. In a broader sense, this is perhaps unsurprising and possibly timely given the clear imperative of combating harmful tax practices as one of the action points being implemented under the Base Erosion and Profit Shifting (BEPS) initiative by the OECD. Other countries in the region have also been steadily jumping on the anti-avoidance bandwagon in recent years. China’s State Administration of Taxation issued its administrative measures on the General Anti-Avoidance Rule (GAAR) in late 2014 with the measures having come into effect in early 2015. India’s Central Board of Direct Taxes too has tabled its GAAR which is currently awaiting implementation in 2017/18 financial year. Against a backdrop of increasing global tax scrutiny, the release of these guidelines by Singapore tax authorities points to a worldwide tax environment that is becoming increasingly complex and less forgiving to those who seek to bend the rules.
For more information, please contact:
Ms Lam Fong Kiew
Head of Tax