In the case of AVD v Comptroller of Income Tax (Comptroller), the ITBR ruled that the Comptroller was wrong to reject the taxpayer’s application for a waiver of the shareholding test.
“It is without doubt that the outcome of this ruling will be well received by taxpayers,” said Ong Sim Ho, director of tax at Singapore law firm Drew & Napier.
The taxpayer involved was a Singapore company that was indirectly owned by four family members, and had incurred significant tax losses in previous years of assessment, before its shareholdings were restructured to make one family member the sole owner of the company.
For a Singapore taxpayer to carry forward unabsorbed deductions for use in a future year of assessment, it must comply with the so-called shareholding test.
This rule requires that there is no substantial change (more than 50%) in the ultimate shareholders of the company from the last day of the year in which the loss was incurred and the first day of the year of assessment in which such loss would otherwise be deductible.
If the taxpayer undertakes a shareholder rearrangement for a purpose other than deriving a tax benefit, the Comptroller should exempt it from the shareholding test.
However, despite the taxpayer arguing that the change to its shareholding was due to family reasons, and that no tax advantage was gained, the Comptroller refused to grant a waiver of the shareholding test.
Edmund Leow, of Baker and McKenzie, said the Inland Revenue Authority of Singapore (IRAS) took the position that since the transfer was not for commercial reasons, but for personal ones, the waiver should not have been given.
The Comptroller cited a circular it had itself issued, which set out an exhaustive list of circumstances in which such a waiver could be granted, including nationalisation and privatisation.
However, the ITBR ruled it improper for the Comptroller to adhere so rigidly to this circular and concluded that the circumstances set out therein should not be exhaustive.
Leow said the ruling is significant for taxpayers because it illustrates the principle that even though the legislation gives the IRAS discretion, the courts can still review the exercise of that discretion.
“The ruling shows that if the exercise of discretion was not in line with the policy behind the legislation, the courts can examine the discretion and reverse the IRAS decision,” said Leow.
“Taxpayers will now be more confident in challenging the IRAS in the exercise of its statutory discretion,” he added.
Ong said now the ITBR has ruled that the circumstances set out in the IRAS’s circular are not exhaustive, he expects to see arguments put forth by taxpayers claiming their right to unabsorbed tax deductions on the basis of this case.
“For restructuring situations that are clearly beyond the taxpayer’s control, it is reassuring to note that the ITBR has confirmed that the taxpayer will be able to avail itself of the unused deductions,” said Ong.
Taxpayers will be reassured by the decision, but the ruling does not, however, provide guidelines as to how the ITBR will determine whether the purpose of a restructuring was to gain a tax advantage.
So, beyond the straightforward cases, it may still be difficult for taxpayers to obtain an exemption from the IRAS.
“Pending clarification as to how the governing consideration should be determined, it is unclear whether other taxpayers will be similarly entitled to the deductions, apart from the examples provided by the ITBR,” said Ong.
Another plus for taxpayers is that the IRAS can be expected to be more careful in how they exercise their discretion, meaning they won’t be quite so aggressive.
“Consistent with the recent call for the legal cogency and coherence of a decision to be demonstrably justifiable in Singapore, it may also be expected that the Comptroller will be more receptive to what taxpayers have to say and to provide more detailed reasoning for any decision made,” said Ong.
