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    01:18 PM Rachael Seow (LLB 4 candidate, Faculty of Law, National University of Singapore); Justin Tan (Senior Lecturer, Faculty of Law, National University of Singapore)

    A Tale of Three (Tax) Provisions: Delimiting the Boundaries of Executive Authority and the Precedent Fact Doctrine

        

    Introduction

    It is commonplace for statutes to give executive bodies the discretion to grant, withhold or set conditions for obtaining certain benefits provided by the statute. This contribution argues that not all discretions are created equal; instead, the provision conferring such discretion must always be carefully examined to delimit the boundaries of such discretion. It also offers some thoughts on the precedent fact doctrine outside of the judicial review context. We advance these two points through an examination of three tax cases where the discretion of the Inland Revenue Authority of Singapore (“IRAS”) was challenged by the taxpayer, successfully so in two of them. The three tax cases are:

    1. GDY v Comptroller of Goods and Services Tax [2021] SGGST 1  (“GDY”);
    2. Re Asia Development Pte Ltd [2019] SGHC 18 (“Asia Development” – the taxpayer appealed this judgment, and its appeal was dismissed: Asia Development v The Attorney-General [2020] SGCA 22); and
    3. AVD v The Comptroller of Income Tax [2011] SGITBR 3 (“AVD”).

    GDY

    The taxpayer in GDY was in the business of selling electronic goods to Malaysian customers who collected them from the taxpayer’s Singapore place of business and hand-carried the goods to Malaysia on motor vehicles. Under the Goods and Services Tax Act 1993 (the “GST Act”), a supply of goods that are exported is zero-rated (ie the GST rate on such supply is 0%).

    IRAS, after several rounds of audit, denied zero-rating on the taxpayer’s sales. It based its decision mainly on the fact that the taxpayer had failed to maintain certain documents required for zero-rating under IRAS’ published administrative guidance (namely, IRAS’ e-Tax Guide on Exports, or “ETG”). In particular, the taxpayer failed to maintain a declaration form and to record the carrier’s vehicle number on the requisite export permit. The relevant rules (collectively, the “Goods Zero-Rating Rules”) provided that (i) a supply of goods “is” zero-rated where IRAS is satisfied that the goods are exported; and (ii) where IRAS is satisfied that the goods are to be exported, zero-rating applies if the taxpayer (generally) produces evidence of export as required by IRAS and complies with conditions that IRAS may impose for the protection of revenue.  

    The taxpayer argued that zero-rating should nonetheless apply because it had documentation which objectively proved that the goods in question had been duly exported, and that the ETG’s requirements had been materially complied with. It further argued that the requirements of the ETG were not legally binding and that in any case, it was superseded by specific instructions from IRAS which the taxpayer had complied with.

    The Goods and Services Tax Board of Review (the “GST Board”) decided in favour of the taxpayer, deciding that once the taxpayer had provided evidence supporting the actual export of the goods, IRAS then had to take the necessary steps to examine whether such export had occurred. In the absence of such steps, it was not fair and reasonable for IRAS to deny the taxpayer zero-rating for failing to satisfy the documentary requirements of the ETG (at [130] – [131]. IRAS appealed the GST Board’s judgment to the High Court, which dismissed the appeal on the basis that the taxpayer had complied with IRAS’ specific instructions, and those specific instructions were not superseded by the ETG: Comptroller of Goods and Services Tax v Dynamac Enterprise [2022] SGHC 61).

    Asia Development

    Section 74(1) of the Stamp Duties Act 1929 (“SDA”) provides a useful contrasting example of how Parliament can instead clearly indicate its intention to confer wide discretion to an executive body. This was the provision in question in Asia Development where the taxpayer was appealing the denial by the Minister (specifically the Minister’s delegate being the Chief Tax Policy Officer) of his application for a time extension to complete and sell a property. Meeting this deadline was a condition for the remission of additional buyer’s stamp duty.

    The High Court in dismissing the taxpayer’s appeal noted that the all-encompassing language of s 74(1) supported a finding that the SDA intended to confer an “absolute discretion upon the Minister” (at [8]).

    Section 74(1) of the SDA is reproduced below:

    74.—(1)  The Minister may, in his or her discretion and subject to such conditions as he or she may impose, reduce or remit, prospectively or retrospectively, in the whole or any part of Singapore, the duties with which any instrument or any particular class of instruments, or any of the instruments belonging to such class, or any instrument when executed by or in favour of any particular class of persons, or by or in favour of any members of such class, are chargeable.

    AVD

    In AVD, the taxpayer company sought to access certain tax benefits (unabsorbed tax losses) that under the relevant tax provision required the taxpayer to first pass a “substantial shareholding test”. The taxpayer’s ultimate shareholders had changed for family reasons. Consequently, it failed the “substantial shareholding test”.

    Under s 37(15) (then) of the Income Tax Act 1947 (“ITA”), the substantial shareholding test “may” be waived if IRAS was satisfied that the substantial change in the shareholders of the taxpayer was “not for the purpose of deriving any tax benefit or obtaining any tax advantage”. IRAS refused to waive the substantial shareholding test and the taxpayer appealed to the Income Tax Board of Review (“Income Tax Board”).

    The Income Tax Board held in favour of the taxpayer, deciding that IRAS should have waived the substantial shareholding test because the change in the taxpayer’s substantial shareholders was for family and not tax reasons. The Income Tax Board noted that IRAS had unlawfully fettered its discretion by (i) rejecting the taxpayer’s application for the waiver “on the grounds that its case did not fall within any of the circumstances set out in the Circular”; and (ii) failing to apply its mind to the “governing consideration of whether the substantial change in shareholders [was] “for the purpose of” deriving any tax benefit or obtaining any tax advantage” (at [30]).

    Discussion

    This contribution makes two points. The first point: comparing the three cases, GDY, Asia Development, and AVD, we argue that the strength of IRAS’ discretion to grant a tax benefit lies on a spectrum.

    GDY illustrates the conferral of a weak discretion. The benefit (zero-rating a supply of goods) is predicated on the goods being exported, which is a question of fact. The court is in as good a position as IRAS to judge whether goods are in fact exported. Also, zero-rating necessarily follows the fact of export; the provision says the supply of goods “is” zero-rated (and not “may be” zero-rated”) where IRAS is satisfied that they are exported. So there is no residual discretion for IRAS to deny zero-rating if the goods are indeed exported.

    In contrast, Asia Development is an example of IRAS being awarded a strong discretion: the benefit (stamp duty remission) “may” be granted by the Minister, full stop. The SDA does not prescribe any condition or factor that circumscribes the exercise of the discretion, and this indicates a strong discretion (in the words of the High Court, “absolute”).

    The strength of the discretion awarded to IRAS in AVD lies in the middle of the spectrum. It is weaker than that in Asia Development because the discretion is circumscribed by a condition, viz. whether the change in shareholders of the taxpayer was for the purpose of deriving any tax benefit or obtaining any tax advantage. But it is also stronger than the discretion awarded in GDY. First, whether a change in shareholders is tax-driven is a judgment call regarding the taxpayer’s motivations after an objective analysis of the facts. Because IRAS has more expertise and experience than a court in determining whether an arrangement is tax-driven, eg because IRAS has more intimate knowledge of the interaction between tax provisions and the behaviour of taxpayers, it is in a better position than IRAS to make this judgment call. Second, the provision says that IRAS “may” (and not “must”) waive the substantial shareholding test. This implies that IRAS has a residual discretion not to waive the test, even if it is objectively determined that the change in shareholders is not tax-driven. In this situation, a court will have to respect that residual discretion, subject to IRAS having a reasonable basis for not waiving the test.    

    The principle that underlies the three judgments is that not all discretions are created equal; instead, the words of the provision conferring such discretion must be carefully examined to delimit the boundaries of such discretion. In particular, much depends on whether:

    1. the provision prescribes any condition or factor that circumscribes the exercise of discretion (typically; this will be accompanied by the word “satisfied”; viz. the executive body must be satisfied of the presence or absence of that condition or factor); and
    2. the executive body has a residual discretion (ie whether the discretion is phrased as a “may” instead of a “must” or “shall”).

    We turn to this contribution’s second point: the GDY decision offers a good opportunity to relook the precedent fact doctrine, albeit outside a judicial review proceeding. Imagine, for the sake of argument, that GDY had been a judicial review proceeding. The precedent fact doctrine would then have worked as follows. When IRAS makes zero-rating a supply of goods conditional on satisfying conditions in the ETG, we must remember that the conditions are not an end in themselves, but a means for establishing the fact of export. The end is to determine whether the goods are in fact exported. If the taxpayer can demonstrate that fact through alternative means, IRAS must allow zero-rating if it is to be faithful to Parliament’s intention that exports must be zero-rated.

    Under the precedent fact doctrine, an executive body’s exercise of discretion can be overturned by a court pursuant to judicial review proceedings if the decision is not justified by the evidence as to the presence or absence of a fact. The leading case on the precedent fact doctrine is the judicial review case of Re Fong Thin Choo [1991] 1 SLR(R) 774 (“RFTC”). Coincidentally, RFTC also concerns an executive body’s satisfaction as to the fact of export.

    RFTC concerned reg 12(6) (then) of the Customs Regulations Reg 12(6), which read:

    The owner of any goods removed under the provisions of this regulation or his agent shall, if so required by the proper officer of customs, produce evidence that such goods have been exported or reexported and shall pay the customs duty leviable on any part of such goods – (a) not accounted for to the satisfaction of the proper officer of customs; or (b) if they are found to have been illegally re-landed in Singapore. (emphasis added)

    The Director-General of Customs and Excise ("DG") had required the applicant’s company to pay customs duty based on its conclusion that the goods had not been exported. This was because the relevant goods had not been entered in the vessel’s manifest. However, the High Court decided that in coming to such a conclusion, the DG had failed to take into account relevant evidence adduced by the applicant's company which would have rebutted the prima facie evidence of non-export, and had thus made an insufficient inquiry before arriving at his decision.

    Although it was not pleaded, Chan J opined that reg 12(6) was a “precedent fact case” as the "satisfaction" referred to in regulation 12(6) was not a matter of pure judgment or opinion. It was also concerned with an inquiry as to a fact, namely that of export. Accordingly, the executive discretion involved was the DG’s “discretionary power to decide whether the evidence produced by the applicants accounted for the export of the goods” (at [35]). In such cases, the court opined that its role was to “decide whether the decision was justified by the evidence” (at [32]).

    However, the precedent fact doctrine has its limits. Confined squarely by the four walls of the text, it must arise as a matter of construction (see Chng Suan Tze v Minister for Home Affairs [1988] 2 SLR(R) 525 at [108]). Some have gone further to argue that any exercise of executive discretion (ie any executive decision) can be challenged if it was based on a misunderstanding or ignorance of an established and relevant fact (see Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1976] UKHL 6). This can be justified from a ‘fairness’ standpoint, as decisions based on incorrect facts are a cause of injustice which the courts should be able to remedy. Moreover, this would also maintain confidence in public administration. However, currently in Singapore, decisions based on errors of fact can only be reviewed for sufficiency of evidence (pursuant to judicial review proceedings) if the fact in question is a “precedent fact”, because of the judiciary’s hesitance in usurping what it sees as the executive’s prerogative (see Swati Jhaveri, “Administrative Law in Singapore: Recent Developments and Looking Ahead”, Law Gazette (May 2019), online: https://lawgazette.com.sg/feature/administrative-law-in-singapore-recent-developments-and-looking-ahead/).

    Does the fact that the precedent fact doctrine has thus far applied only to judicial review proceedings mean that it cannot be applied to GDY’s appeal to the GST Board? Arguably, no, because the precedent fact doctrine merely gives a court adjudicating in a judicial review proceeding the same tool that a tax tribunal already possesses in a non-judicial-review proceeding. The precedent fact doctrine allows the court to adjudicate the existence of a fact on the merits. Judicial power is rightly constrained in a judicial review proceeding because judicial review presupposes a situation where the taxpayer has exhausted all legal remedies. So the expansion of judicial power is simultaneously signalled and justified by the special words “precedent fact doctrine”. In contrast, the taxpayer in GDY was pursuing a legal remedy in the ordinary way laid out in the GST Act, ie by appealing to the GST Board. It goes without saying that the GST Board can adjudicate on the existence of any fact on the merits. There is no need to invoke special words for this power.

    Ultimately, where Parliament has clearly indicated in statute for what purpose an executive body’s discretion is to be exercised, as in GDY and RFTC, the discretion is accordingly limited to upholding that purpose and failure to do so permits challenge. This is necessary to uphold a purposive approach to statutory interpretation.  As Wee Chong Jin CJ famously noted in Chng Suan Tze v Minister for Home Affairs [1988] 2 SLR(R) 525 (at [86)]:

    “[T]he notion of a subjective or unfettered discretion is contrary to the rule of law. All power has legal limits and the rule of law demands that the courts should be able to examine the exercise of discretionary power. If therefore the Executive in exercising its discretion under an Act of Parliament has exceeded the four corners within which Parliament has decided it can exercise its discretion, such an exercise of discretion would be ultra vires the Act and a court of law must be able to hold it to be so.” 

    * This blog entry may be cited as Rachael Seow & Justin Tan, “A Tale of Three (Tax) Provisions: Delimiting the Boundaries of Executive Authority and the Precedent Fact Doctrine (Date) (http://www.singaporelawblog.sg/blog/article/279)

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