Singapore's GAAR and Its Impact on Outbound Structures: Case Studies and Tax Planning Perspectives

1. Speaker profile: vikna rajah Partner Head Tax, Trust and Private Client E vikna.rajah@rajahtann.com T +65 6232 0597

2. Presentation Agenda Case studies of Singapore’s GAAR application 1 2 Impact on India’s outbound structures Not to be reproduced or disseminated without permission. 2

3. Presentation Agenda Case studies of Singapore’s GAAR application 1 Not to be reproduced or disseminated without permission. 3

4. Tax Planning “Tax planning is largely a matter of form. While there is nothing improper for the appellant to arrange its affairs which best advanced its interest … it has to bear the consequences of its chosen method.” - Chao Hick Tin J Andermatt Investments Pte Ltd v Comptroller of Income Tax [1995] 2 SLR(R) 866

5. General Anti-avoidance provision Section 33 Income Tax Act (Cap. 134, Rev Ed 2014) (“ITA”) Comptroller may disregard certain transactions and dispositions 33.—(1) Where the Comptroller is satisfied that the purpose or effect of any arrangement is directly or indirectly — (a) to alter the incidence of any tax which is payable by or which would otherwise have been payable by any person; (b) to relieve any person from any liability to pay tax or to make a return under this Act; or (c) to reduce or avoid any liability imposed or which would otherwise have been imposed on any person by this Act, the Comptroller may, without prejudice to such validity as it may have in any other respect or for any other purpose, disregard or vary the arrangement and make such adjustments as he considers appropriate, including the computation or recomputation of gains or profits, or the imposition of liability to tax, so as to counteract any tax advantage obtained or obtainable at person from or under that arrangement. (2) In this section, “arrangement” means any scheme, trust, grant, covenant, agreement, disposition, transaction and includes all steps by which it is carried into effect. (3) This section shall not apply to — (a) any arrangement made or entered into before 29th January 1988; or (b) any arrangement carried out for bona fide commercial reasons and had not as one of its main purposes the avoidance or reduction of tax. [Emphasis added]

6. CIT v AQQ • Comptroller of Income Tax v AQQ and another appeal [2014] 2 SLR 847 • Facts: • Corporate restructuring and financial arrangement undertaken by a Malaysian corporate group that had the effect of granting the taxpayer substantial tax refunds. • The financial arrangement comprised a series of transactions, one of which involved the taxpayer incurring significant interest expenses. • As a result of incurring such interest expenses, the taxpayer was able to reduce its income tax liability, which resulted in the taxpayer being eligible for the aforementioned tax refunds.

7. CIT v AQQ • Structure of B Group and subsidiaries prior to 2003: B Group 100% 100% C D 50% 50% E 50% 50% F 50% 50% G

8. CIT v AQQ • Structure of B Group and subsidiaries from 2003: B Group 100% 100% AQQ C 100% 100% 100% 100% E F G D

9. CIT v AQQ • Flow of funds: N Bank Singapore (5) Payment for Notes (1) Payment for Notes 8.845% interest 8.850% interest N Bank Mauritius AQQ (2.2) Payment of $75m for shares in E, F and G 8.840% interest (4) Payment for Notes (2.1) Payment of $150m for shares in D, E, F and G C (3) $150m interest-free loan D B

10. CIT v AQQ • CA took the following steps: • Consider whether an arrangement falls under section 33(1) ITA (i.e. whether the purpose or effect of an arrangement was to alter the incidence of tax, relieve a liability to pay tax or reduce or avoid any liability imposed or would have otherwise been imposed under the ITA). • If the arrangement falls under any of the three limbs under section 33(1) ITA, the courts will then consider whether the taxpayer is able to avail himself of the exception to the GAAR under section 33(3)(b) ITA. • If the taxpayer can satisfy the court that the tax advantage obtained arose from the use of a specific provision in the ITA that was within the intended scope and Parliament’s contemplation and purpose, both as a matter of legal form and economic reality within the context of the entire arrangement, the taxpayer will be entitled to do so.

11. CIT v AQQ • Once an arrangement is determined to be an anti-avoidance arrangement, and that the taxpayer cannot avail himself of the statutory exception, the Comptroller is entitled to disregard the arrangement, vary or make adjustments to the tax elements of the arrangement and impose liability to tax, in order to counteract the tax advantage gained by the errant taxpayer. • CA held that the financial arrangement was a tax avoidance one and disregarded the entire arrangement. • CA also stated that it had a “limited standard of review” over the Comptroller’s discretion

12. CIT v AQQ • “the limited standard of review over the Comptroller’s discretion did not warrant the [lower court judge] substituting his own view for that of the Comptroller as to how the tax advantage ought to have been counteracted” • “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”. • “[t]he Comptroller was justified in adopting any method that was broadly appropriate to the object of counteracting the tax advantage, even if the method adopted did not precisely correlate the particular elements of tax advantage with the discrete steps of the arrangement that were deemed objectionable”.

13. GBF v CIT • GBF v The Comptroller of Income Tax [2016] SGITBR 1 is the first case on section 33 ITA to be heard after AQQ • Facts: • Financial arrangement undertaken by a Singaporean medical practitioner that had the effect of granting the taxpayer substantial tax savings. • The arrangement comprises the formation of a corporate partnership that would receive the taxpayer’s compensation pursuant to a sale and purchase agreement in relation to the sale of the taxpayer’s company to a third party buyer. • As a result of a start-up exemption scheme, the amount of tax charged on the compensation payable to the partnership was much lower than if the taxpayer received it directly. • SGITBR held that the Appellant was caught under section 33 ITA

14. GBF v CIT Early 2008 1996 July 2008 a W GBF W GBF B * SPA D E G (Directors include GBF and F) G $ GBF (Sole employee) GBF (Sole employee) C (Partnership) *Under the SPA, GBF’s physician compensation was 40% of Gross Operating Income

15. GBF v CIT Appellant’s arguments • Partnership structure was adopted for business convenience and benefits derived. • Intended to grow practice by inviting other practitioners to come onboard as partners. • Protection from practice and business risks. • No intention to avoid tax. That GBF was able to invoke section 43(6A) ITA for start-up exemption for both corporate entities was merely incidental.

16. GBF v CIT Tax authority’s arguments • But for the partnership arrangement, B would have paid the said total sum to GBF personally. • The arrangement did not change the way GBF operated his practice. • The true effect of the arrangement therefore satisfied all three limbs of section 33(1) ITA. • As for section 33(3)(b) exception, it was unusual for GBF not to be paid for the medical services rendered to G where GBF remained employed, even after the SPA. • “Business convenience and benefits derived” arguments also fail, since the partnership arrangement was a complex one and could not readily be seen as the usual thing to do. • No valid explanation for the incorporation of E. • Given the substantial tax savings, a reasonable inference was that the tax advantages were at least 1 of the main purposes, if not the predominant purpose of the arrangement.

17. GBF v CIT ITBR’s decision • According to AQQ v CIT, it is an objective testto ascertain the ‘purpose and effect’ under section 33(1), whereas under the section 33(3)(b) exception, it is to discern the subjective intentionbehind the arrangement. • As to the purpose behind the corporate partnership, there was no partnership agreement in existence. • Arrangement was formed solely to receive the 40% pursuant to the SPA and manage it in the most tax efficient manner. There was nothing in writing to support GBF’s oral evidence that arrangement was part and parcel of investment in B under the SPA. • There was no written evidence to bring in practitioners, there was no other practitioner recruited until the end of the venture. • Since GBF’s oral explanation could not be corroborated by any other contemporaneous evidence, the requirements of section 33(1)(a),(b) and (c) are satisfied.

18. GBF v CIT ITBR’s decision (cont’d) • Section 33(3)(b) exception cannot be invoked, because: • Business convenience of partnership structure not supported in writing, and also not enjoyed as no other practitioners came onboard (also no written evidence of any discussion or effort to bring in any other practitioners); • Lag of 4½ months between signing of SPA and formation of corporate partnership – one would have expected the structure to be set up in tandem with the SPA if it was indeed part of GBF’s investment in B; • No change in the modus operandi of the practice of G; • No interaction between corporate partnership and patients of the clinic (the only discernible role played by C was to receive GBF’s physician compensation, and no business risk was in fact managed by C and its 2 corporate partners); • Role of E was inexplicable; • Corporate partnership, with its 2 corporate partners, had no functional role in the practice of G.

19. Presentation Agenda 2 Impact on India’s outbound structures Not to be reproduced or disseminated without permission. 19

20. BILATERAL TAX AGREEMENTS WHAT • Avoidance of Double Taxation Agreements (“DTAs”) • Prevents double taxation of income earned in one jurisdiction by a resident of the other jurisdiction. • Include provisions for automatic exchange of information for tax purposes • Key DTAs: All ASEAN members, China, Japan, South Korea, Taiwan, Australia, New Zealand and the United Kingdom • Limited Treaties • Hong Kong, and the United States of America

21. BASE EROSION AND PROFIT SHIFTING (BEPS) WHAT • Initiative of the OECD which entered into force on 1 July 2018 • BEPS targets tax avoidance strategies adopted by corporations to exploit gaps and mismatches in tax rules of various countries to artificially shift profits to low or no-tax locations. • Goals • Improve coherence of tax rules across borders • Reinforce substance requirements of tax rules • Enhance transparency and certainty

22. Singapore position on beps • Singapore has addressed the following areas targeted by BEPS project: • Countering Harmful tax practices (Action 5) • Preventing treaty abuse (Action 6) • Permanent establishment status (Action 7) • Transfer Pricing (“TP”) (Actions 8-10) • Country by Country Reporting and TP Documentation (Action 13) • Enhancing Dispute Resolution (Action 14) • Multilateral Instrument (Action 15)

23. Countering Harmful tax practices • Singapore has committed to the compulsory spontaneous exchange of information (“SEOI”) on certain tax incentives falling within the scope of the Forum on Harmful Tax Practices • Inclusive Framework's peer reviews • Incentives require substantive economic activities in Singapore

24. Preventing treaty abuse • Principle purpose test adopted • Taxpayer will be denied treaty benefits if one of the principal purposes of a transaction is to obtain treaty benefits • Uncertainty for taxpayers seeking to rely on Singapore-India DTA to secure a particular tax outcome • However, taxpayers and investors with bona fide commercial transactions or operations should not be unduly concerned with the PPT, which seeks to address abusive arrangements.

25. Permanent establishment status • Singapore opt in to Option B of the MLI which preserves the specific activity exemptions from PE status under all its existing DTAs, irrespective of whether or not such activities are deemed preparatory or auxiliary in nature.  • Ensures that businesses with foreign operations do not unduly create taxable presence in the foreign jurisdiction. • Provides certainty to taxpayers that rely on the specific activity exemptions to avoid establishing a PE in the countries they operate in.

26. Transfer pricing Section 34D ITA Transactions not at arm’s length 34D.—Subsection (1A) applies where — (a) 2 persons are related parties; (b) conditions are made or imposed between them in their commercial or financial relations (called in this section actual commercial or financial relations) which differ from conditions which would be made or imposed if they were not related parties and dealing independently with one another in comparable circumstances (called in this section arm’s length conditions); and (c) had the arm’s length conditions been made or imposed — (i) the amount of the income of one of those persons for a year of assessment that accrued in or is derived from Singapore, or is received in Singapore from outside Singapore, would be greater; (ii) the amount of any deduction that may be allowed to one of those persons for a year of assessment would be less; or (iii) the amount of any loss of one of those persons for a year of assessment would be less.

27. Transfer pricing Section 34D ITA Transactions not at arm’s length 34D.—(1A) The Comptroller may make one or more of the following adjustments in that case, as appropriate: (a) increase the amount of the income of the person mentioned in subsection (1)(c)(i) for the year of assessment; (b) reduce the amount of the deduction that may be allowed to the person mentioned in subsection (1)(c)(ii) for the year of assessment; (c) reduce the amount of the loss of the person mentioned in subsection (1)(c)(iii) for the year of assessment.

28. Country-by-country reporting (CbCR) and TP Documentation • On 21 June 2017, Singapore signed the Multilateral Competent Authority Agreement on the exchange of CbC Reports  • This enables Singapore to efficiently establish a wide network of exchange relationships for the automatic exchange of CbC Reports (India is one of them) • Singapore-headquartered multinational enterprises (MNEs) with consolidated group revenue of at least $1,125 million are required to prepare and file CbC reports to IRAS for financial years beginning on or after 1 January 2017 • The CbC Reports are supplementary to TP documentation and may be used for high-level transfer pricing risk assessment purposes, and may also be used by tax administrations in evaluating other BEPS related risks and where appropriate for economic and statistical analysis.

29. TP Documentation requirements (section 34F Income Tax act)

30. Enhancing tax dispute resolution • Enhance availability and access by, for example, extending time limits to ensure that taxpayers would have at least three years to submit a MAP request under applicable treaties • Making MAP more effective in resolving disputes by implementing MAP agreements regardless of statutory time limits; and • Providing for corresponding adjustments unilaterally where they find that the taxpayer’s objection is justified.

31. Multilateral convention to implement tax treaty related measures to prevent BEPS (MLI) • On 21 December 2018, Singapore ratified the MLI, which will enter into force for Singapore on 1 April 2019 • Singapore intends for the MLI to apply to its DTA with India which is also in the list of jurisdictions that would like to amend their respective DTAs • The minimum standards under the BEPS Project, which are mandatory provisions, that Singapore adopted when amending the DTA are: • Article 6 - purpose of a covered tax agreement • Article 7 – preventing treaty abuse • Article 16 – mutual agreement procedure

32. PRACTICAL STEPS TO TAKE • It is critical that taxpayers document their commercial intent when entering into arrangement. • Oral evidence with regard to intention needs to be supported with facts • Such documentation should be made at the time when decisions are made and be consistent with subsequent facts and actions.

33. Disclaimer The material in this presentation is prepared for general information only and is not intended to be a full analysis of the points discussed. This presentation is also not intended to constitute, and should not be taken as, legal, tax or financial advice by Rajah & Tann. The structures, transactions and illustrations which form the subject of this presentation may not be applicable or suitable for your specific circumstances or needs and you should seek separate advice for your specific situation. Any reference to any specific local law or practice has been compiled or arrived at from sources believed to be reliable and Rajah & Tann does not make any representation as to the accuracy, reliability or completeness of such information.

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