Tag: ITBR

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

On By taxsgIn Case Updates

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.

Income Tax Board of Review: ATG v The Comptroller of Income Tax [2011] SGITBR 2

On By taxsgIn Case Updates

5 October 2011

In ATG v The Comptroller of Income Tax [2011] SGITBR 2, the Income Tax Board of Review (ITBR) was asked to consider the appeal by the Appellant to allow a claim for capital allowances under s 19(2) and 19A of the Income Tax Act (Chp 134) (“the Act”) in respect of capital expenditure incurred for its plant and machinery used by its sub-contracts and vendors (collectively, “the Sub-contractors”). Revised assessments for YA 2003 and YA 2004 were issued where the Appellant’s tax assessment amounted to $27,159,001.42 and $42,177,255.62 respectively.

The Appellant is a Singapore incorporated company carrying on the manufacture of high precision components and devices (“the Products”) and the manufacture of certain equipment for manufacturing the Products. To be cost effective, parts of the Appellant’s manufacturing operations for the Products is outsourced to independent Sub-contractors, with businesses in and outside of Singapore.

In YA 2003 and 2004, the business arrangement with the sub-contractors with respect to the manufacturing of the Products was structured on a “buy-sell” model, where the Sub-contractors would:

  • procure certain components of the Products from third-party parts vendors and/or the Appellant
  • process and/or assemble them
  • manufacture the finished Products and/or components, and
  • sell the finished Products and/or components to the Appellant.

The pricing formula agreed between the Appellant and the Sub-contractors ensured that the Sub-contractors did not profit from the buying and ownership of the raw materials which were required to be purchased from specific Appellant-designated suppliers.

Certain plant and machinery for manufacturing the Products and components were placed by the Appellant at the Sub-contractor’s premises for the purpose of manufacturing the Products and components.

The Appellant had claimed annual allowances under s 19 of the Act and capital allowances under s 19A of the Act for YA 2003 and YA 2004.

The Respondent refused the Appellants’ claims by way of various assessments.  The Appellant appealed to the Board.

The appeal was allowed. The key findings are summarised below:

1. The sole issue is whether the plant and machinery placed by the Appellant with the sub-contractors for use in manufacturing processes for the Products were in use by the Appellant for the purpose of its trade, profession or business, thus entitling the Appellant to capital allowances on such plant and machinery under ss 19(2) and 19A(1) of the Act.

Section 19(2) of the Act reads:

“Where at the end of the basis period for any year of assessment, a person has in use machinery or plant for the purpose of his trade, profession or business, there shall be made to him, on due claim, in respect of that year of assessment an allowance for depreciation by wear and tear of those assets (to be known as an annual allowance) which shall be calculated in accordance with …”

Section 19A(1) of the Act reads:

“Notwithstanding section 19, where a person carrying on a trade, profession or business incurs capital expenditure on the provision of machinery or plant for the purpose of that trade, profession or business, there shall be made to him, on due claim for any year of assessment and in lieu of the allowances provided by section 19, an annual allowance of 33 1/3% in respect of the capital expenditure incurred.”

It should be noted that s 19A(1) provides for a period of claim for capital allowances as an alternative to that provided in section 19. Under s19A(1), the capital allowances may be claimed over a shorter three-year period.

2. Sections 19(2) and 19A(1) are to be strictly construed and with regard to their purposes (Ramsay v Inland Revenue Commissioners [1981] 2 WLR 449 at 456). The words and language in the section are to be given a natural meaning and should not be stretched in favour of the Comptroller (Attorney-General v Earl of Selborne [1902] 1 KB 388 at 396; The Union Cold Storage Company v Jones (H.M. Inspector of Taxes) 8 TC 725).

3. The purpose of the sections is to provide for allowances in respect of capital expenditure on the provision of plant or machinery for the purposes of the taxpayer’s trade, profession or business (Comptroller of Income Tax v GE Pacific Pte Ltd [1994] 2 SLR(R)948  at [27]).

4. The expression “for the purpose of trade” means “for the purpose of enabling a person to carry on and earn profits in the trade” (Smith’s Potato Estates Limited v Bolland (Inspector of Taxes) [1948] AC 508 at 526).

5. There must be a connection between the expenditure incurred and the taxpayer’s trade, profession or business. Whether there is such a connection is a question of fact and degree. In considering the question, it is important to consider whether the expenditure is “really incidental to the trade” in question or was incurred “for the purpose of earning the profits” (Strong & Co. v Woodifield [1906] AC 448 at 452 and 453). A finding of the purpose (of earning the profits) is not affected by the fact that the expenditure also benefits a third party to some extent (Usher’s Wiltshire Brewery Ltd v Bruce [1915] AC 433 at 469 to 470).

6. The plant and machinery were indeed used for the purpose of the Appellant’s trade or business and for earning profits for the Appellant. The fact that the Sub-contractors also obtained a benefit to some extent or earned profits from the use of the plant and machinery does not deprive the Appellant from claiming capital allowances on the plant and machinery under ss 19(2) and 19A(1) of the Act. Nor does the fact that the Sub-contractors incurred risks in the manufacturing process or had ownership of the Products before they were sold to the Appellant detract from the finding that the plant and machinery were used for the purposes of the Appellant’s trade or business.

7. In this case, there is a sufficient connection between the capital expenditure incurred on the provision on the plant and machinery and the Appellant’s trade or business as:

  • The plant and machinery were placed at the Sub-contractor’s premises for the exclusive use of manufacturing the Products and their components for the Appellant and the Appellant continued to own and maintain the plant and machinery whilst they were at the Sub-contractors’ premises. The plant and machinery contained the Appellant’s proprietary design over which the Appellant maintained ownership and close control. Training and customised technical knowledge for the operation of the plant and machinery was supplied by the Appellant. Access to the plant and machinery was controlled, and measures were taken to prevent counterfeiting.
  • The costs of maintenance and repairs were borne by the Appellant, as were depreciation costs. The Sub-contractors did not bear the depreciation costs and did not add these to the price of the Products sold to the Appellant.
  • The Sub-contractors were not typical manufacturers making profits from materials used in the finished products. They did not profit from the buying and ownership of the raw materials. Sourcing of these materials was through Appellant-designated suppliers.
  • There is nothing in s 19 or 19A to suggest that a taxpayer cannot claim capital allowances on such a plant or machinery even though a third party can also benefit from its use.

The above decision was delivered on 27 July 2011.