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How to avoid a tax dispute in Singapore

Singapore is renowned for its multinational-friendly tax regime and for being a favourable holding company jurisdiction. However, this does not mean that disputes with the authorities cease to be a concern for taxpayers in the country.

International Tax Review speaks with two of Singapore’s tax controversy leaders to find out what multinationals should be wary of if they want to keep themselves out of the courts.

International Tax Review (ITR): How can taxpayers avoid getting into disputes with the tax authorities in Singapore?

Allen Tan, Baker & McKenzie (AT): If there is an existing point of contention with the Inland Revenue Authority of Singapore (IRAS), multinational companies (MNCs) should first consider engaging in administrative negotiations with IRAS.

It would be extremely helpful to their cause if the MNCs had maintained a proper and complete record of their business activities in support of any position taken during negotiations with IRAS.

Historically, IRAS has shown itself to be amenable to such discussions in a bid to obtain a compromise favourable to both parties, and to avoid unnecessary tax litigation.

MNCs can often enlist the assistance of government bodies such as the Economic Development Board, where appropriate, when negotiating with IRAS. Their assistance may often lead to a more favourable outcome for the MNCs, for example in substantiating certain commercial positions taken by a corporate taxpayer in the past.

Falgun Thakkar, PwC (FT): To avoid corporate tax disputes with the IRAS, taxpayers should maintain sufficient commercial substance in Singapore that is commensurate with their representation that they are legitimate tax residents of Singapore (where treaty benefits are enjoyed) and their transfer pricing arrangements. Taxpayers may also work with IRAS to obtain greater clarity on IRAS’ position with respect to their dealings.

With respect to Goods and Services Tax (GST) in Singapore, IRAS expects large taxpayers to have the necessary controls in place to be compliant with GST requirements. Large taxpayers are also encouraged to participate in compliance initiatives such as the Assisted Compliance Assurance Programme. Typically, taxpayers under such compliance initiatives are less likely to come under audits by IRAS.

ITR: What options do taxpayers have to resolve tax disputes in Singapore other than litigation? What are the benefits and drawbacks of those options?

AT: Instead of waiting until the dispute arises, MNCs may apply to the Comptroller of Income Tax (Comptroller) for an advance ruling on how a provision of the Income Tax Act applies or would apply to them and to the arrangement for which the ruling is sought.

Advance rulings bind the Comptroller in the manner set out in the ruling. The ruling is private and confidential in nature, and will not be released to the public.

This is a relatively quick and cost-efficient approach. However, the downside is that an issued ruling is final and cannot be subject to an appeal process. Moreover, the ruling is private and granted on a case-by-case basis, which means that the same ruling cannot be relied upon in subsequent applications.

Another option is for MNCs to engage in administrative negotiations with IRAS when tax disputes arise. There is no formal approach to commence negotiations.

The upside is that negotiations regularly lead to settlements on a percentage basis, inclusive of penalties and interest, especially when IRAS believes that the taxpayer has a legitimate point of contention. We have also assisted clients in successfully persuading IRAS to accept its tax position.

The downside is that the period of time taken to resolve the tax dispute can potentially be shortened if the dispute, at the first instance, is litigated in court.

FT: In Singapore, litigating tax matters in the courts is usually a last resort. Taxpayers may object to corporate tax assessments made by the IRAS within 30 days from the date of the service of notice of assessment from IRAS. If no agreement is reached, the taxpayer may appeal to the Income Tax Board of Review. Should either party be dissatisfied with the outcome, it may choose to take the case before the Singapore courts.

The time lag involved in resolving the dispute may create an administrative hassle as the taxpayer is required to set aside resources to deal with issues relating to the past. Further, the uncertain tax positions may require larger provisions, and also affect cash flows.

To increase tax certainty and minimise provisions needed for tax purposes, taxpayers may opt to take pre-emptive steps to manage potential tax risks and have certainty with respect to their tax positions. When the issues are specific to domestic tax, the taxpayer may seek an advance ruling from the IRAS. In cases relating to transfer pricing arrangements with related parties, the taxpayer may avail itself to the Advance Pricing Arrangement (APA) mechanism available under domestic laws, as well as tax treaties between Singapore and the respective contracting states.

ITR: What are the main issues for multinationals that are leading to tax disputes in Singapore at the moment?

AT: The issues arising from recently published tax cases span a wide range of tax issues. They range from disputes on capital allowances on pre-fabricated structures, and even to deductibility of interest rate swap payments and misappropriation of funds by a company director.

That being said, MNCs should note that IRAS, in recent years, has begun to take an increasingly aggressive stance where tax compliance is concerned. IRAS has also conducted more income tax audits as compared to previous years.

Therefore, MNCs would do well to ensure they are compliant in relation to their tax affairs, and consider engaging specialist and external advisers whenever they are unsure whether a tax position or tax planning structure is viable under Singapore law.

ITR: Have you seen any trends in the types of cases that Singapore’s tax authorities are taking up? And the cases in which the authorities are being successful in the courts?

AT: In light of the paucity of Singapore tax court cases, it may be premature to suggest whether the tax authorities are being successful in the courts in particular types of case.

However, as a matter of interest, I would like to highlight the recent case of AQQ v the Comptroller of Income Tax [2011] SGITBR 1, which is the first published case on Singapore’s income tax anti-avoidance provision. The case has been appealed to the Singapore High Court, and a judgment is expected soon. This case suggests that IRAS is increasingly scrutinising tax planning strategies that it regards as avoidance.

FT: IRAS has increased its emphasis on transfer pricing and has been equipping its general tax assessors with increased transfer pricing knowledge.

Based on our observations, it appears that IRAS’ current focus is on taxpayers which have been suffering losses, or having very low profitability in recent years. Although Singapore has not seen any case specific to transfer pricing before the courts at present, given the current conditions, it may be a matter of time for this to happen given IRAS’ current focus.

In addition, Singapore has an anti-avoidance provision in its income tax legislation. While it is presently still unclear how IRAS will rely on this provision, there is a case of alleged tax avoidance that is currently before the courts in Singapore.

ITR: What can Singapore taxpayers expect from the tax authorities in the next one or two years in terms of audit focus and litigation strategy?

AT: If the current trend continues, Singapore taxpayers can expect to see a marked increase in enforcement actions by IRAS. It is not unusual for IRAS to name and shame errant taxpayers to deter others from following suit.

It has also taken to publishing some of the landmark enforcement cases periodically on its website and in local press to serve as a reminder to taxpayers who are deliberately under-reporting their tax liabilities.

On the whole, the policy stance taken by IRAS seems to be more aggressive where tax compliance is concerned.

In addition, in light of the AQQ case, taxpayers should generally expect that IRAS will increasingly scrutinise tax planning arrangements that appear contrived or artificial and do not appear to be carried out for genuine commercial reasons.

Taxpayers will hope the High Court will set out in detail the boundaries of how IRAS can seek to apply the anti-avoidance provision in practice in its judgment.

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