INCOME TAX BOARD OF REVIEW,  SINGAPORE | Japan | branch | Relevant Cases in the field of international taxation

INCOME TAX BOARD OF REVIEW,  SINGAPORE | Japan | branch | Relevant Cases in the field of international taxation

INCOME TAX BOARD OF REVIEW,  SINGAPORE

AYN Corporation

v.

Comptroller of Income Tax

L.R. PENNA, RONNY TAN CHONG TEE & TAN TEE JIM, CORAM

IT APPEAL NO. 14 OF 2010?

MARCH 21, 2012

 

Singapore - Singapore/Japan - Business profits - Article 7 of DTAA between Japan and Singapore - Article 7 of OECD Model Tax Convention - Whether, where an assessee closed a branch in foreign country due to losses which could remained unabsorbed, the same could be set off with profits of new branch set-up later in the same country - Held, yes [In favour of assessee] [Section 37 read with section 2 of Singapore income-tax Act]

FACTS

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Appellant, a Japanese company, had incorporated a branch in May, 1992 to carry on business in Singapore. In June, 2004 the appellant closed its branch as the branch was suffering losses. In this regard Registrar of Companies at Singapore was duly informed.

In April, 2006 the appellant opened a new branch to carry out its business and earned profits. The appellant took a view that branch was just an extension of Head office and had no separate legal entity and, therefore, unabsorbed losses of old branch could be set off with profits of new branch. The Comptroller objected to the same on the ground that branch was a separate entity for tax purposes in accordance with Article 7(2) of Singapore-Japan DTAA. With the closure of the branch in June, 2004, the right to tax the income of branch in Singapore also ceased.

HELD

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Relevant section of Singaporean Income-tax Act ("SA) read as under:

Sec. 37(1) of SA - "assessable income of any person ? shall be the remainder of his statutory income for that year after the deductions allowed in this Part"

Section 37(3)(a) of SA permits to deduct "the amount of loss incurred by that person in any trade, business, profession or vocation, which, if it had been a profit would have been assessable under this Act"

Section 2(1) of SA defines a person as "Company, a body of persons and a Hindu joint family"

The Sec. 37(1) of SA made reference to 'any person'. Now the moot question was whether the 'branch' was a person or not. In this regard, the authorities referred to Sec. 368 of the Companies Act, which allows a foreign company to set-up its branch in Singapore to carry on its business. Therefore, branch is said to be an extension of HO and has no separate legal entity.

Apparently, it was the appellant's business which was carried on in Singapore. Therefore, it didn't matter whether it was carried on by an old branch or a new branch, which meant that profits or loss of the branch constituted profits or losses of appellant. Therefore, the losses would be available for set-off.

In regard to overriding effect of DTA over Income-tax Act, it was held that as per para 14 of OECD report on the attribution of profits to PE, the PE is a mere fiction necessary for purpose of determining profits of this part of the enterprise under Article 7.

Therefore, Article 7 is just concerned with determining the profits of PE. However, the Article is not concerned with how the profits of PE should be dealt with, such as allowing losses, etc. This part of set off is covered under concerned section 37 of SA, and DTA doesn't override this.

Therefore, it was held that unabsorbed losses of closed branch could to be set off with profits of new branch

Gandhi Nand Singh, Tang Siau Yan (Allen & Gledhill LLP) for the Appellant. David Lim and Quek, Hui Lingfor the Respondent.

ORDER

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Introduction

1. This is an appeal by AYN Corporation ("Appellant") against the assessment issued by the Comptroller of Income Tax ("Comptroller") concerning its tax liability for the Year of Assessment 2008.

2. The issue in the appeal is whether the Appellant can carry forward its unabsorbed losses which it incurred from its operations in Singapore before it de-registered as a foreign company in June 2004 to offset the profits which it made from its operations in Singapore after it re-registered itself as a foreign company in April 2006.

Factual Background

3. The Appellant was incorporated in Japan in 1961. In May 1992, it registered a branch ("old branch") pursuant to section 368(1) of the Companies Act (Chapter 50) ("CA") to carry on business in Singapore.

4. In June 2004, the Appellant notified the Registrar of Companies and Businesses, as required by section 377 of the Companies Act, 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.

5. In April 2006, the Appellant re-registered itself in Singapore as a foreign company and carried on business through a newly-registered branch ("new branch").

6. Between 1992 and 2004, the Appellant's old branch incurred losses (amounting to about $30.0 million) from its operations in Singapore. The losses were unabsorbed when it de-registered in June 2004 ("unabsorbed losses"). After its re-registration in April 2006, the Appellant's new branch made profits from its operations in Singapore ("current profits"). 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").

7. 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".

8. The Appellant disagreed and applied to the Comptroller under section 76(2) of the ITA for the assessment for the Year of Assessment 2008 to be reviewed and revised.

9. On 16 July 2010, the Comptroller issued a Notice of Refusal to Amend in respect of his assessment for the Year of Assessment 2008.

10. On 23 July 2010, the Appellant filed with the Comptroller and the Secretary to the Income Tax Board of Review a Notice of Appeal under section 79(1) of the ITA.

Parties' Cases

Appellant's Case

11. The Appellant argues 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 utilize 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.

12. Specifically, the Appellant points out that section 37(3)(a) of the ITA allows the deduction of "the amount of loss incurred by that person in any trade, business, profession or vocation" and that the definition of "person" in section 2 of the ITA as including a "company", which term is in turn defined as "any company incorporated or registered under any law in force in Singapore or elsewhere". Thus, when section 37 of the ITA refers to the loss incurred by a "person", it refers to the legal entity which is the taxpayer, not its branch.

13. The Appellant's case is that the Avoidance of Double Taxation Agreement ("DTA") between Singapore and Japan (the "Singapore-Japan DTA") is not relevant, as it deals with determination of the profits (or losses) in Singapore of a foreign enterprise through the operations of its permanent establishment ("PE") as if the PE were a separate and distinct entity acting independently, and not with the carrying-forward of unabsorbed losses of previous years of the enterprise.

Comptroller's Case

14. The Comptroller's position is that the Appellant is not entitled to utilize the losses of the "old branch" for setting-off against the profits of the "new branch". This is because, 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.

15. The Comptroller also submits that a 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.

Discussion and Decision

16. Section 37(1) of the ITA provides that the "assessable income of any person ? shall be the remainder of his statutory income for that year after the deductions allowed in this Part have been made" (emphasis added). Under section 37(3)(a), there shall be deducted

"(a) the amount of loss incurred by that person in any trade, business, profession or vocation, which, if it had been a profit would have been assessable under this Act, in the following order:

 (i)  firstly, any balance of such loss which remains unabsorbed at the end of the basis period for the previous year of assessment; and

(ii)  secondly, the amount incurred during the basis year of assessment." (emphasis added)

17. 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.

18. As highlighted above, there is a reference in section 37 to the income and losses of a "person". The use of the word "person" is significant. The word is defined in section 2(1) of the Act as referring to a "company, a body of persons and a Hindu joint family". The term "company" is in turn defined in the Act to mean "any company incorporated or registered under any law in force in Singapore or elsewhere". It is undisputed that the Appellant is a company incorporated in Japan. In our view, when section 37 refers to a "person", it refers to a legal entity who is a taxpayer (such as the Appellant).

19. Section 37(3)(a) indicates that the taxpaying person must have incurred the losses in "trade, business, profession or vocation". Under section 368 of the CA, 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. This is also clear from 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 which states at paragraph 3.2 that:

"Every foreign company, before it establishes a place of business or commences to carry on business in Singapore through the establishment of a branch in Singapore, shall lodge with ACRA the documents as prescribed in the Companies Act for registration. A branch of the foreign company, for all intents and purpose, is the same legal person as the parent company formed outside Singapore. It is therefore not a subsidiary company which is owned by the foreign parent company." (emphasis added)

20. It seems to us from this that 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. This means that any profits and losses incurred by a branch of the Appellant would be the profits and losses of the Appellant, not of the branch. It follows that the unabsorbed losses incurred by the old branch between 1992 and 2004 are those of the Appellant. As such, they would be available for set-off under section 37(3)(a) of the ITA against the Appellant's future profits, provided there is no substantial change (of more than 50%) in the shareholders and their shareholdings of the Appellant (see section 37(12) read with section 37(14)(a) of the Act).

21. The Comptroller however submits that Article 7 of the Singapore-Japan DTA overrides or modifies the position under section 37(3)(a) of the ITA.

22. Articles 7(1) and (2) of the Singapore-Japan DTA read as follows:

"1. The profits of an enterprise of a Contracting State shall be taxable only in that contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment."

The "other Contracting State" is hereafter referred to as the "second Contracting State".

23. The intention of a DTA is the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. Its intention is not to create income tax liabilities which are not found in the ITA or in addition to those in the ITA. In particular, Article 7(1) of the Singapore-Japan DTA provides that the profits of a PE are taxable in the second Contracting State only if the profits are attributable to the PE located in that state.

24. Article 7(2) treats the PE as if it were a distinct and separate enterprise in the second Contracting State for the purposes of attributing the profits of the PE on which it should pay tax in that state. Without the provision, there would be an ambiguity as to how the profits would be attributed to the PE and taxed in the second Contracting State. According to the OECD "Report on the Attribution of Profits to Permanent Establishments" of July 2008 (the "OECD Report") at paragraph 14 (at page 13), the hypothesis by which a PE is treated as a distinct and separate enterprise

"is a mere fiction necessary for purposes of determining the business profits of this part of the enterprise under Article 7".

25. The OECD Report indicates at paragraph 1 (at page 10) that:

"The importance of the PE concept can be seen from the following extract from paragraph 1 of the Commentary on Article 7 of the OECD Model Tax Convention:

When an enterprise of a Contracting State carries on business in the other Contracting State, the authorities of that second State have to ask themselves two questions before they levy tax on the profits of the enterprise: the first question is whether the enterprise has a permanent establishment in their country; if the answer is in the affirmative the second question is what, if any, are the profits on which that permanent establishment should pay tax. It is with the rules to be used in determining the answer to this second question that Article 7 of the OECD Model Tax Convention on Income and Capital (OECD Model Tax Convention) is concerned?."

26. The OECD recommends that the profits which should be attributed to a PE are

"the profits that the PE would have earned at arm's length if it were a legally distinct and separate enterprise performing the same or similar functions under the same or similar conditions". (see paragraph 10 (at page 12) of the OECD Report)

27. The OECD Report explains at paragraph 13 (at page 13) that this requires a two-step functional and factual analysis. Under the first step, the analysis must identify the economically significant activities and responsibilities undertaken by the PE and should, to the extent relevant, consider the PE's activities and responsibilities in the context of the activities and responsibilities undertaken by the enterprise as a whole, particularly those parts of the enterprise that engage in dealings with the PE. The second step involves a determination of the remuneration of any dealings between the hypothetical enterprises by applying by analogy transfer pricing tools by reference to the functions performed, assets used and risk assumed by the hypothetical enterprises. The result of these two steps

"will be to allow the calculation of the profits (or losses) of the PE from all its activities, including transactions with other unrelated enterprises, transactions with related enterprises ? and dealings with other parts of the enterprise."

28. It is evident from the above extracts of the OECD Report that Article 7 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 so determined, such as by allowing past losses to be used to set off against the profits of the PE. That is the purview of section 37(3)(a) of the ITA. We therefore do not think that the Article overrides or modifies section 37(3)(a) of the ITA.

29. Accordingly, we hold that the unabsorbed losses of the Appellant are available for set-off under section 37(3)(a) of the ITA against its profits.

30. The Comptroller points out that the unabsorbed losses were utilized by the Appellant in Japan and could not therefore be used again in Singapore to set off against its profits. He contends that the losses "cannot be utilized twice - both in Singapore and Japan - as this would lead to a case of double claim of deduction, and would confer an undue tax benefit on the Appellant" (original emphasis). However, the Comptroller has not cited any legal basis to support the contention. In fact, section 37(3) (a) of the ITA does not indicate that the unabsorbed losses can be prevented from being utilized to set off against profits if they have already been utilized in another country.

Conclusion

31. In the result, we allow the appeal with costs to be taxed if not agreed.

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†Business Profits - Singapore - Singapore/Japan - Article 7 of DTAA between Singapore and Japan - Article 7 of OECD Model Tax Convention.