Transfer pricing and general anti-avoidance: two of the most feared weapons in the Revenue’s arsenal. Most scenarios on the tax planning spectrum may be addressed and countered by the Revenue’s exercise of either provision. But what of fact patterns which fall under the possible ambit of both provisions? How would the two interact? More pertinently, what are the considerations which a taxpayer should take into account when faced with the uncertain prospect of having to defend against either or both provision(s)?
This topic is a technical and narrow one on which there has been precious little guidance from either the courts or the Revenue. As such, the analysis must begin from first principles – the proper statutory interpretation of sections 34D and 33 of the Income Tax Act. A comparative analysis reveals there to be differences between the two provisions along the dimensions of intitation power, subject, trigger, analytic (i.e. the operative test), actions and exceptions (i.e. taxpayer’s defence).
As expected, there is some overlap in the ambit and operation of the two provisions. Interestingly, on a high-level analysis, most scenarios falling under the transfer pricing provision could arguably be addressed with the general anti-avoidance provision. The devil as always however, is in the details. For example, while the general anti-avoidance provision contains a carve-out statutory defence where the taxpayer acted for bona fide commercial reasons, the transfer pricing provision provides for no such defence.
Depending on the specific facts of each case therefore, the invocation of either provision may be relatively easier or more difficult for the taxpayer to resist. This consideration would naturally influence which provision the Revenue would choose to wield in any given case. The Hong Kong Court of Final Appeal decision of Ngai Lik Electronics Company Limited v Commissioner of Inland Revenue (2009) 12 HKCFAR 296 is an instance where the Revenue attempted to invoke the general anti-avoidance provision in what would usually be considered a transfer pricing scenario.
A similar attack was mounted by the Malaysian Revenue in the Malaysian Special Commissioners’ decision of MM Sdn Berhad v Ketua Pengarah Hasil Dalam Negeri, although in this instance the court was decidedly less inclined to avail the Revenue the weapon of its choice.
While every case will turn on its own specific facts, the legal reasoning of the Hong Kong and Malaysian courts in the above cases may be relevant should a similar issue arise in Singapore.
Taxpayers faced with the potential application of either provision should also be conscious of the relevance of commercial justifications. While the commerciality of a transaction would in both cases provide some level of defence against the Revenue, in order to be effective, such commerciality should be framed or articulated in a way which directly addresses the differing statutory formulations in sections 34D and 33. A condition imposed between related parties for bona fide commercial reasons may nevertheless not be an arm’s length one, and vice versa. A taxpayer faced with a query along either line would need to be deft in ensuring that, while addressing one provision, he does not inadvertently cross the line on the other.