Income Tax Board of Review: TTT v Comptroller of Income Tax

3 May 2012

This case is an appeal by TTT (“Appellant”) against the assessment issued by the Comptroller of Income Tax (“Comptroller”) concerning its tax liability for the Year of Assessment 2008.

The main issue in this appeal is whether the old branch and the new branch of the Appellant are the same person for deducting the unabsorbed losses of the former from the profits of the latter.

The Appellant was incorporated in Japan in 1961. In May 1992, it registered a branch to carry on business in Singapore. In June 2004, the Appellant notified the Registrar of Companies and Businesses that it had not had a place of business in Singapore and its old branch had ceased to carry on business in Singapore with effect from 18 June 2004. In April 2006, the Appellant re-registered itself in Singapore as a foreign company and carried on business through a newly-registered branch.

Between 1992 and 2004, the Appellant’s old branch incurred losses amounting to about $30 million from its operations in Singapore. The losses were unabsorbed when it de-registered in June 2004. After its re-registration in April 2006, the Appellant’s new branch made profits from its operations in Singapore. In its income tax returns for the Year of Assessment 2008, the Appellant sought to deduct the unabsorbed losses against the current profits under section 37(3)(a) of the Income Tax Act (Cap 134) (“ITA”).

The Comptroller disallowed the claim on the ground that “the unabsorbed losses of the branch that has been de-registered are not allowable against the income of a newly registered branch.

The Appellant then appealed to the Income Tax Board of Review.

The Appellant’s position is that a branch office is an extension or arm of its head office and exists to carry on the business of the head office. The registration of a branch of a foreign company in Singapore does not create a separate entity. It is the foreign company that carries on business in Singapore, not the branch. As such, it is entitled to utilise the unabsorbed losses because there is nothing in the ITA which forbids the unabsorbed losses from being available for set-off against the current profits.

The Comptroller’s position is that for tax purposes of profit or loss attribution, a branch is treated as a distinct and separate entity from the enterprise of which it is a part. The Comptroller argues that this position is clear from Article 7(2) of the Singapore–Japan DTA and that the Article overrides or modifies the position under section 37(3)(a) of the ITA. The Singapore branch’s profits are ring-fenced to its operations in Singapore. Applying the separate entity concept, the profits and losses of a branch “belong” to it. When the branch terminates its operations in Singapore and ceases to carry on business in Singapore, the Comptroller’s to tax the income of the branch also ceases. Thus, any unabsorbed losses of a de-registered branch should be disregarded upon the cessation of its operations and business in Singapore.

The appeal was allowed. It was held that unabsorbed losses of the Appellant are available for set-off under section 37(3)(a) of the ITA against its profits provided there is no substantial change in shareholdings of the Appellant as required by section 37(14)(a) as:

  • When section 37 of the ITA refers to a “person”, it refers to a legal entity who is a taxpayer (such as the Appellant). Whether the Appellant’s business was carried on in Singapore by an old branch or a new branch, it is the Appellant which carried on the business.
  • Any profits and losses incurred by a branch of the Appellant would therefore be the profits and losses of the Appellant, not of the branch. As such, the unabsorbed losses incurred by the old branch between 1992 and 2004 are those of the Appellant.
  • Section 37(3)(a) of the ITA indicates that the taxpaying person must have incurred the losses in “trade, business, profession or vocation”. A foreign company may set up a branch in Singapore by registration with ACRA and carry on trade or business in Singapore through the branch. The branch is an extension or arm of the foreign company in Singapore and exists to carry on the business of the foreign company in Singapore. It has no separate legal personality. The Consultation Paper entitled “Review of the Registration and Regulatory Regime for Foreign Companies under the Companies Act (Cap. 50)” issued by ACRA in October 2007 also states at paragraph 3.2 that “…A branch of the foreign company, for all intents and purpose, is the same legal person as the parent company formed outside Singapore…”
  • Article 7 of the DTA is concerned with determining the profits (or losses) of a PE located in the second Contracting State and the determination is to be carried out on the basis of the profits being earned at arm’s length as if the PE were a distinct and separate enterprise “performing the same or similar functions under the same or similar conditions”. The Article is not concerned with how the second Contracting State deals with the profits determined, such as by allowing past losses to be used to set off against the profits of the PE.

The Comptroller pointed out that the unabsorbed losses were utilised by the Appellant in Japan and could not therefore be used again in Singapore to set off against its profits. However, no legal citation was given to support the contention, and further, section 37(3)(a) of the ITA does not indicate that the unabsorbed losses can be prevented from being utilised to set off against profits if they have already been utilised in another country.

The above judgment was delivered on 21 March 2012.