APAC Tax Matters: 12th edition


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At a glance

  • Appeal concerning the waiving of the shareholders’ test as regards unabsorbed losses
  • Deductibility of losses of a deregistered branch against the profits of a new branch

During the last 12 months, the Income Tax Board of Review (BOR) and the High Court handed out decisions on cases dealing with amongst others, the deductibility of losses in different circumstances. We set out below a summary of two decisions that may be of interest and relevance to corporate taxpayers.

Appeal concerning waiver of shareholders’ test as regards unabsorbed losses

In AVD v CIT1, the BOR was asked to consider whether the Comptroller of Income Tax (CIT) had properly exercised his discretion in not allowing the appellant a waiver from the shareholders’ test2 in respect of the carry forward of its unabsorbed losses. 

AVD was a member of a group of companies which was a family business. It was involved in a restructuring exercise pursuant to a family arrangement, which resulted in a substantial change in its shareholders and their shareholdings. AVD applied to the CIT for a waiver of the shareholders’ test on the grounds that the restructuring exercise was due to a family arrangement, and not “for the purpose of deriving any tax benefit or obtaining any tax advantage”.

The CIT refused to grant the waiver as the case did not fall within any of the circumstances3 where CIT would generally regard as not being for the purpose of deriving any tax benefit or obtaining any tax advantage. In addition, IRAS viewed the restructuring as having taken place for personal rather than commercial reasons.

Being dissatisfied with the CIT’s decision, AVD appealed to the BOR.

In allowing the appellant’s appeal, the BOR expressed that the list of circumstances stated in the IRAS circular was not exhaustive. The BOR found that the CIT did not challenge whether the restructuring arrangement was tax motivated or not. The BOR was of the view that the CIT had not applied his mind to the governing consideration of whether the substantial change of shareholders was “for the purpose of deriving any tax benefit or obtaining any tax advantage”.

The CIT seemed impervious to the company’s arguments and submissions, and did not consider the possibility that a private or family arrangement could be made for purposes other than deriving a tax benefit or obtaining a tax advantage. Moreover, the CIT did not offer any explanation or reasons for the rejection of the waiver application other than merely stating that there was no genuine commercial basis for the substantial change in the company’s shareholders.

The above decision serves to highlight that the CIT should inform the taxpayer of the precise grounds for a rejection or disallowance in a dispute resolution process. In addition, the case reinforces that the governing consideration in any waiver application should always be whether a substantial change in shareholders was “for the purpose of deriving any tax benefit or obtaining any tax advantage” rather than a rigid reliance on the IRAS’ list of circumstances.

Deductibility of losses of a deregistered branch against the profits of a new branch

In AYN v CIT4, the BOR allowed a company to carry forward its unabsorbed losses incurred from its Singapore operations before it was deregistered as a foreign company, for offset against the profits made from its Singapore operations after being re-registered as a foreign company and carrying on business through the newly-registered branch.

The CIT had disallowed the company’s claim for deduction of its old branch losses against the profits earned by its newly-registered branch, the CIT being of the view that any unabsorbed losses of a deregistered branch would be disregarded on cessation of the branch’s operations and business in Singapore.

The main issue was whether the company’s old branch and the new branch was the same person for purposes of deducting the old branch losses.

In the BOR’s view, a branch is an extension or arm of a foreign company in Singapore and exists to carry on the business of the foreign company in Singapore; it has no separate legal personality. The BOR was of the opinion that whether the foreign company's business was carried on in Singapore by an old branch or a new branch, it was the same foreign company which carried on the business in question.

Hence, any profits and losses incurred by a branch of the foreign company would be the profits and losses of the foreign company, not of the branch. It follows that the unabsorbed losses incurred by the old branch before deregistration were those of the foreign company. Such unabsorbed losses should therefore be available for set-off against the foreign company’s future profits, provided there is no substantial change in the foreign company’s shareholders and their shareholdings.

As the foreign company was a resident of Japan, the BOR also considered the provisions of the Business Profits Article in the double tax treaty between Singapore and Japan. In this regard, the BOR ruled that the determination of the profits of the new branch as provided for in the treaty, did not override the utilisation of the losses against profits of the new branch.

1 AVD v The Comptroller of Income Tax [2011] SGITBR 3

2The carry forward and carry back of losses and capital allowances are subject to the condition that the shareholders remain substantially (50% or more) the same at the relevant comparison dates. If the shareholder of the loss company is itself another company, look-through provisions apply through the corporate chain to the final beneficial shareholder.

3 The circumstances are set out in an Inland Revenue Authority of Singapore (IRAS) circular entitled ”Utilising unabsorbed capital allowances, trade losses and donations” updated on 29 June 2012.

4 AYN Corporation v The Comptroller of Income Tax [2012] SGITBR 1