Charting the Limits of Acceptable Tax Planning in Singapore

In 2015, Singapore celebrates its 50th year of independence and also mourns the passing of its first Prime Minister Lee Kuan Yew who steered Singapore’s success for many critical years.

From its origins as a British trading post in 1819, Singapore has grown into one of the busiest ports and largest financial centres in the world, despite having no natural resources and being situated in a region described as having the potential of exploding into the ‘Balkans of Asia’.

Singapore’s population of diverse ethnicities now approaches six million, out of which nearly 25 per cent are foreign born with the rest being descendants of migrants: 75 per cent are ethnic Chinese and close to 15 per cent are Muslims, all concentrated on a tiny land mass contained in commercial skyscrapers and high-rise public housing.

In the midst of the constantly changing socio-economic, religious, cultural diversity, it was recognised early on in Singapore that a strong legal system with effective enforcement of the rule of law was essential. Therefore acceptable tax planning in Singapore is a legal imperative set within a framework of rule of law regulated and enforced by the government and authorities: it is not merely a moral imperative dependent on internal self-regulation devised by businesses. This is reflected by the bilateral treaties, legislation, court and administrative decisions.

‘BEPS’ and the Exchange of Information

Singapore has an extensive double tax treaty network comprising 87 double tax treaties and information exchange agreements, including with China, Taiwan and Hong Kong, India, Myanmar, Malaysia, Indonesia and Vietnam. There is an exchange of information agreement with Bermuda, full tax treaties with Germany, United Kingdom and a limited treaty with the US. Singapore and France have signed a revised double tax agreement on 15 January 2015, which includes new provisions on exchange of information (EOI) and general anti-avoidance.

The Income Tax (Amendment) Bill 2014, was passed on 3 November 2014 and included amendments to enable Singapore to ratify the Convention on Mutual Administrative Assistance in Tax Matters (the Convention), which Singapore signed on 29 May 2013. The convention expands Singapore’s multilateral exchange-of-information partners by 13 jurisdictions, including the US, promoting international tax cooperation, as well as new anti-avoidance provisions to prevent circumvention of the exchange-of-information provisions.

Applications to court are no longer required for disclosure pursuant to exchange of information (EOI) requests made by foreign tax authorities in relation to information held by banks and trust companies, provided that the information requested is foreseeably relevant and is not pursuant to a fishing expedition. The decision to disclose will now be made by the IRAS and subject to judicial review by the courts. The process of judicial review will be subject to confidentiality obligations under EOI arrangements.

In ABU v Conptroller of Income Tax [2015] SGCA 4, the Singapore Court of Appeal (CA) issued its most recent decision on EOI concerning a request from the Japanese tax authorities, setting down the following principles in relation to EOI requests:

(a) The justification of the request is to be assessed on the face of it, rather than adjudicating on the validity or veracity of a request.
(b) A request could only be made after the double tax treaty had been given effect as a prescribed arrangement, but once made, the request could relate to information pertaining to an earlier period, unless a contrary provision had been expressly made under the relevant tax treaty.
The Inland Revenue Authority of Singapore (IRAS) generally takes guidance from the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.

New transfer pricing guidelines were issued by the IRAS on 6 January 2015. The IRAS has indicated that they will review adjustments, to ensure that arm’s length prices are indeed achieved, particularly in relation to self-initiated retrospective adjustments by taxpayers triggered by subsequent changes in circumstances, such as compliance with revised group global transfer pricing policies, or to avoid potential transfer pricing adjustments by other tax authorities.

The IRAS will not allow retrospective downward adjustments in the absence of contemporaneous transfer pricing documentation, and is not precluded from bringing retrospective upward adjustments to tax if this is in accordance with the arm’s length price.

Taxpayers are required to inform the IRAS of any double taxation from transfer pricing adjustments, and to seek relief from double taxable through the mutual agreement procedure in a relevant double tax agreement.

The Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (CDSA) criminalises the laundering of benefits derived from criminal offences, and provides for powers to investigate and confiscate such proceeds of crime.

Amendments were introduced with effect 1 July 2013, to include a range of tax crimes as money laundering predicate offences. Financial institutions are required to conduct customer due diligence, monitor transactions and report suspicious transactions with regard to the identification and assessment of tax related risks. Further amendments came into force on 15 October 2014, increasing the imprisonment penalties for money laundering offences to 10 years, and clarifying the application of dual criminality for foreign tax evasion offences as allowing for prosecution so long as the offence has been criminalised in the foreign jurisdiction. Property of corresponding value can be confiscated if instruments of crime are dissipated. These amendments complement the changes to the Terrorism (Suppression of Financing) Act in 2013. Amendments will be introduced to the Mutual Assistance in Criminal Matters Act (MACMA) to strengthen Singapore’s mutual legal assistance framework, and the Commercial Affairs Department (CAD) has also tripled its financial investigation resources.

The Taxpayer’s Choice vs Purposive Approach

On 26 February 2014, the Singapore Court of Appeal (CA) delivered its first decision on the construction of the general anti-avoidance provision in the income tax legislation, 26 years after the provision was enacted in 1988. AQQ v CIT [2014] SGCA 15 is a landmark decision, setting out the principles of interpretation of the general anti-avoidance provision, section 33 of the Income Tax Act.

The two main contenders in this race of interpretation were the choice principle and the purposive approach. The choice principle had its origins in a landmark House of Lords UK decision (see: The Commissioners of Inland Revenue v The Duke of Westminster [1936] AC 1 at 19) enshrining the freedom of every man to order his affairs so as to pay the least tax.

The CA rejected the choice principle, on the basis that the general anti-avoidance provision was intended to strengthen the ability of the Comptroller to deal with increasingly complex tax avoidance schemes. The taxpayer must satisfy the court that the use of the specific provision was within its intended scope and when viewed in the light of the arrangement as a whole, had altered the incidence of tax in a way that was within the contemplation and purpose of the legislature. If it was not, it will be a tax avoidance arrangement.

A classic indicator is when the taxpayer obtains the benefit of the statutory provision in an artificial or contrived way. The court is not confined as to the matters which may be taken into account, and is also not limited to purely legal considerations, but may consider whether the arrangement, viewed in a commercially and economically realistic way, uses the specific provision in a manner that is consistent with the legislature’s purpose.

The CA accepted that discerning whether the use of a specific provision was within the purpose of Parliament would not be an easy task, as tax legislation evolves in a fragmented manner according to policy shifts at any single point in time and it may not be always possible to identify a coherent set of intentions within the Act. The advantage of the scheme and purpose approach is that it provides a fairer framework in applying the general anti-avoidance provision, instead of asserting a doctrinal position that leans entirely in favour of the taxpayer’s choice.

The CA also affirmed the standard of review that the Comptroller had to exercise his powers in a manner that was ‘fair and reasonable’, as a sufficient measure of protection to the taxpayer. The court is therefore entitled to strike down any 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(1). However, where there are two or more methods of counteracting a tax advantage, it is not for the court to decide that one particular method is to be preferred over the others.

Conclusion:

Singapore has no natural resources and is very dependent on international trade and co-operation. In view of this, Singapore’s legislation and courts continue to place high emphasis on international co-operation, as it recognises that its national interests are aligned with international interests within a calibrated framework defined by the rule of law to ensure certainty and a fair balance of powers.