As can be imagined, this has caused problems over the years between taxpayer and tax collector. The duel has typically taken place in the arena of real estate and share deals. Singapore real estate transactions have always presented low-hanging fruit for the IRAS: they are usually large, obvious, and well documented as a result of the availability of land registry documentation and the need to pay stamp duty on transactions.
The approach for shares however, has been more ambivalent. There is no hiding the fact that many individuals likely "play the market" every day as a matter of course. But unless they register themselves as a business and present formal accounts, they have first call as to whether their transactions constitute trading or not; and taking the view they are on capital account means there is no obligation to file. Given, finally, that “amateurs” are as likely to lose money on the exchanges as make it, the IRAS avoids dealing with a potential mountain of consequential tax loss claims by giving the area some breathing space.
Where the profits are made by a company however, scrutiny is greater, and investment holding companies have routinely found themselves at the centre of the battle. More than anything, taxpayers abhor uncertainty; and the uncertainty surrounding this area was starting to eat into Singapore’s desire to become the regional (or even global) holding company location of choice for multi-national businesses. It was very difficult for tax advisors to put their hands on their hearts and say that there was no risk of taxation at all, when an investment owned by a holding company was sold. It all depended on the facts and circumstances - the well-trodden “Badges of Trade” analysis. As a result, many potential businesses that might have chosen Singapore as their holding company location were put off by this uncertainty, and thought again.
In 2012, a step towards a solution was found and section 13Z was introduced into the Income Tax Act (“ITA”). This was a “statutory” safe-harbour exemption wall around transactions that met certain conditions. In essence, it was a carbon-copy of what in other jurisdictions are referred to as a “participation exemption”.
The thrust of a participation exemption is that it provides automatic tax exemption for dividends from companies in which the investor has held a specified percentage of, usually, economic and voting interest; and, often, but not always, where that portion of the shares has been held for a specified minimum period. The exemption usually goes hand-in-hand with an automatic exemption from capital gains tax, when investments meeting those same requirements are sold.
Singapore already had the equivalent of a dividend exemption in place since 2003 for foreign dividends that met certain criteria, and from 2008 for dividends paid by Singapore companies, with no minimum interest or holding period requirements. So, a fix was needed only for the “capital gains” aspect.
Looking around the world, qualifying criteria for participation exemptions range from no minimum holding period, to two years, and from no minimum participation requirement, to 10%.
Section 13Z was designed to introduce, as the Circular on the subject says: “Certainty of Non-taxation of Companies’ Gains on Disposal of Equity Investments”[1].
In devising the provisions, Singapore, as is its wont, took a conservative approach and formulated the conditions for exemption as follows:
The new rules came into effect from 1 June 2012, and applied to all disposals made on or before 31 May 2017. This time limit was extended for five years in 2017 upon expiry of the first term; and again in Budget 2020, which means it is now set to expire 31 May 2027.
The 24 months and 20% parameters are outliers in the graph plotted by the qualifying conditions in other jurisdictions, but is better than nothing. It is also important to note that, failing the conditions does not lead to automatic taxation. It just meant you are back in the arena throwing sand in each other’s faces and arguing about the Badges of Trade.
There are some additional features of the provisions which may leave something to be desired, and these are discussed below.
It is understandable that the initial tenure of section 13Z was a period of five years, given that it could be seen to be experimental in nature. It is not clear however, why its application has not now been made indefinite given it was first introduced now some eight years ago. It was disappointing therefore, to see a further five-year rollover in the 2020 Budget, particularly given that public feedback had been sought, where permanence must surely have been at the top of the list.
The other puzzling feature of the time limit, is that it applies by reference to when the disposal is made, rather than by reference to when the shares are acquired. This means that shares acquired less than 24 months before the expiry date of the provisions cannot qualify for relief under the provisions in force at that time, since it will not, by definition, be possible to meet the 24 month ownership requirement. In terms of acquisitions, the provisions only therefore have a three-year window period where certainty can prevail. It seems only logical, that if time bars are to remain, they should be by reference to when the shares are acquired rather than when they are disposed of and the exemption should be allowed for any disposal as long as the 24 months holding period requirement is met.
The only nod towards acknowledging this anomaly, is that the Budget 2020 extension announcement came more than two years before the expiry date of the current exemption period. This gives certainty to acquisitions right up to 31 May 2025; whereas the 2017 extension went right up to the wire, leaving the taxpaying community at sixes and sevens for the last two years of the relief period.
An exclusion exists for companies whose profits are governed by the provisions of section 26 of the ITA, namely insurance companies. The reasoning behind this was largely because all profits made by an insurance company were regarded by the IRAS, by definition, as being on revenue account[2]. Despite this view being disproved, it is understandable why the exclusion remains; and as noted above, simply falling outside the provisions does not preclude a claim for capital treatment according to normal principles. It just makes life more difficult.
But an unexpected sting in the tail came in Budget 2020. Currently, an exclusion exists for unlisted companies in the business of trading or holding Singapore immovable property (other than property development companies). An understandable position, in view of our comments above about the vulnerability of Singapore real estate; and development companies are by definition taxable on their property transactions with little resistance.
However, almost out of the blue, the 2020 Budget extended the exclusion, not only to developers of Singapore property, but also to all non-listed property companies holding properties outside of Singapore as well, and whether developers or not. It is not clear what prompted this, other than a hurried explanation in the Budget Appendices that it put all property companies on an equal footing[3]. Transactions in shares in all property companies of all shape, size and geography are now in the combat zone.
The Badges of Trade live on.
[1] IRAS e-Tax Guide: Certainty of Non-taxation of Companies’ Gains on Disposal of Equity Investments, first published on 30 May 2012 and updated on 15 July 2016.
[2] A hole was punched in this view by Comptroller of Income Tax v BBO [2014] SGCA 10 where it was held that insurance companies were subject to the same tax principles as any other business.
[3] Per IRAS website: “In addition, to ensure consistency in the tax treatment for property-related businesses…”
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