STAMP DUTIES (AMENDMENT) BILL

Order for Second Reading read. 1.17 pm

The Minister for Finance (Dr Richard Hu Tsu Tau): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

The Bill seeks to amend the Stamp Duties Act to give legislative effect to the introduction of Electronic-Stamping (E-Stamping) and to allow the Commissioner of Stamp Duties (the Commissioner) additional powers in administering the Stamp Duties Act (the Act). The Act is also amended to introduce a general anti-avoidance provision (similar to that in the Income Tax Act) to minimise instances whereby parties scheme to reduce or avoid the payment of stamp duty on any dutiable instrument.

The introduction of electronic stamping, or E-Stamping, is another initiative to boost the use of information technology in the public service. E-Stamping will replace the current physical stamping of documents with franking machines or revenue stamps. A stamp certificate will be issued on-line to certify that a dutiable instrument has been duly stamped.

When fully implemented, E-stamping allows users, mainly lawyers and other tax agents, to e-stamp dutiable instruments in the convenience of their own offices. E-Stamping also goes hand-in-hand with electronic payment of stamp duty. This would not only minimize the exposure to risk related to manual processing of dutiable documents and payments, but also enhance the efficiency of collection of stamp duty. Amendments to the Act are necessary to give legislative effect to E-Stamping.

Stamp duty is an important source of Government revenue. Sufficient safeguards must be put in place to prevent revenue leakage. To facilitate the administration of the Act, the Commissioner of Stamp Duties would be given additional administrative powers to conduct investigations and to prevent evasion of stamp duties. Amendments are made to the Act to provide for duty payable by a deceased person to be recoverable from his estate so long as the assessment is made within three years after the death. It also requires a company's liquidator to make full provisions for the payment of duty before distributing the company's assets to shareholders. In addition, the Act is amended to confer on the Commissioner powers similar to the Comptroller of Income Tax to enable him to call for and have access to books, accounts and records.

There have been instances where parties scheme to reduce or avoid the payment of stamp duty on dutiable instruments. Clause 15 of the Bill enacts a general anti-avoidance provision, similar to that in the Income Tax Act, to allow the Commissioner to disregard any arrangement that is directly or indirectly structured to avoid, evade or reduce the liability in stamp duty and to make appropriate adjustments.

Several penalties for offences have not been revised for many years. These penalties would lose their deterrent effect if they do not increase in tandem with increases in general income level. Some new penalties are introduced in relation to the improper use and counterfeiting of E-Stamping certificates. The Act is thus amended to revise existing penalties and introduce new ones.

The Bill makes the following amendments to the Stamp Duties Act:

(a) Introduction of new sections 6A - 6D to give legislative effect to the new E-Stamping System. Other general amendments to sections 2, 7, 11, 12, 38, 46, 48 and 57 are also made in connection with the introduction of E-Stamping.

(b) Introduction of new sections 70A, 70B and 70C to confer on the Commissioner powers similar to those of the Comptroller of Income Tax to call for, and have access to, books, accounts and records. Provisions are also introduced to allow duty payable by a deceased person to be recovered from his estate so long as the assessment is made within three years after his death, and to require a company's liquidator to make full provisions for the payment of duty before distributing the company's assets to shareholders.

(c) Introduction of a new section 33A, similar to section 33 of the Income Tax Act (Cap. 134), to allow the Commissioner to disregard any arrangement that is directly or indirectly structured to avoid, evade or reduce the liability in stamp duty and to make appropriate adjustments.

(d) Amendments to sections 62, 63, 66 and 77 to revise existing penalties upwards to commensurate with the severity of various offences. New sections 64, 65 and 65A are also introduced for offences arising from the improper use and counterfeiting of E-Stamp certificates, furnishing of false information and obstruction to the Commissioner and his officers in performing their duties under the Act.

Sir, I beg to move.

Question proposed.

Mr Ong Kian Min (Pasir Ris): Mr Speaker, Sir, I rise in support of the Bill. Before commenting on the provisions of the Bill, I would like to declare my interest as a lawyer in private practice where I advise clients on commercial transactions and corporate restructuring.

Sir, my comments relate to clause 15 of the Bill which proposes to insert a new section 33A. The first thing that struck me about the proposed new section is its similarity to the anti-avoidance provisions contained in section 33 of the Income Tax Act. Section 33A purports to give the Commissioner of Stamp Duties the same wide discretionary powers given to the Comptroller of Income Tax to disregard and/or vary transactions entered into by the taxpayer and to make such adjustments and to impose additional tax, if necessary.

This raises a number of concerns with members of the business community, and I would like to raise these concerns in this House.

Sir, as income tax and stamp duties affect the financial position of the taxpayer, tax and stamp duty planning has become an integral part of modern day commerce and finance, where products and transactions are becoming ever more complex and sophisticated.

It seems to me that the oft-cited dictum of Lord Tomlin in the English House of Lords case of IRC vs. Duke of Westminster (1936) has even greater resonance when applied in the context of anti-avoidance rules in stamp duty. In that case, the judge said that "Every man is entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure that result, then, however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax".

Over and over again, the courts have said there is nothing sinister in so arranging one's affairs so as to keep taxes as low as possible, because nobody owes any public duty to pay more than the law demands. These principles apply even more so to stamp duties as they are a tax on documents and not the underlying transactions per se.

Besides encroaching on the above established principles, the new provision also seems to me to be particularly antecedent to the spirit of encouraging greater freedom and creativity in the financial sector in Singapore. Recently, it has been recognised that there needs to be a radical change in mindset towards financial regulation in Singapore. The new approach will be central to the long term development of Singapore into a world-class financial hub. It is hoped that the change would remove the self-imposed shackles on the financial institutions here and lead to more new and creatively structured financial products. In view of this change in approach, it seems to me to be taking a step backwards to give the Commissioner such wide powers in an area that impacts on so much of commerce in Singapore.

Sir, in the short and medium terms also, we must not forget that we are still in a critical period of recovering from the economic crisis of the last two years. Already there are observations that the momentum of corporate restructuring has slowed and companies are becoming less committed to reform as the short term outlook becomes better. By itself, restructuring involves many difficult decisions, and companies should not be burdened with the additional uncertainty in this area of stamp duty planning.

Sir, in achieving a particular commercial result, there may be many different ways of structuring the transactions leading to it. Tax mitigation is admittedly one of the more important factors in deciding which way to carry out the transactions. The proposed section 33A raises concerns as to how the Comptroller or the Commissioner will view such commercial structures, some of which have become a matter of common practice today.

For example, an outright sale of a property by way of conveyance will attract stamp duty ad valorem at the rate of approximately 3% of the consideration. So if the purchase consideration is $1 million, the stamp duty chargeable is about $30,000. However, if the property is owned by a special purpose investment holding company, the shareholders can sell all the shares of the company to the purchaser instead who will then obtain effective ownership and control of the property. The sale of the shares will attract stamp duty at a substantially lower rate of 0.2% of the value of the shares. So if the property asset is valued at $1 million, but the company has bank borrowings and other liabilities of $500,000, the total net value of the shares will be $500,000, and the stamp duty chargeable on the transfer of all the shares is only $1,000.

Using this example, could the Minister clarify whether the exception in the new section 33A(3)(b) might help? This subsection states that section 33A "shall not apply to any arrangement carried out for bona fide commercial reasons and had not as one of its main purpose the avoidance or reduction of duty". But in subsection (2), "arrangement" means "any scheme, trust, grant, covenant, agreement, disposition, transaction and includes all steps by which it is carried into effect." Does this mean that the Commissioner of Stamp Duties will scrutinise any particular intermediate step and rule that that particular step has been put in place for the purpose of reducing stamp duty? In the sale of property example above, although the bona fide commercial reason for the whole arrangement is the transfer of the property, the main purpose of choosing a sale of the shares of the property-owning company, and not the property itself, may very well be to reduce the amount of stamp duty payable.

In another example, for financing of a project development, the bank will usually take as security, among other things, an assignment of the building contract, an assignment of the sale proceeds, as well as a mortgage over the land. If the legal assignment were stamped as a primary security, it would attract ad valorem duty at the rate of 3% of the contract value. It is thus common for banks to take the mortgage as the principal security and nominate the others as secondary security. Stamp duty on mortgages is capped at $500, and the other documents will attract nominal stamp duty of $10 each.

There are many more examples of stamp duty planning schemes which are widely used in commerce and by individuals to minimise the amount of stamp duty payable, as allowed by law. The business community is rightly anxious about the new provision because it is vague and silent about these tried and tested schemes. Could the Minister clarify the scope of the new section 33A and also place on record what would not be within its ambit?

Sir, like income tax, stamp duty is wholly a creature of statute and it is an established principle of statutory interpretation that clear words are needed to impose tax liability on a person, and that any ambiguity should be resolved in favour of the taxpayer.

On this point, I would have liked this Amendment Bill to address the perennial uncertainty in relation to the share reconstruction exemptions under the present section 15 of the principal Stamp Duties Act. Because of the uncertainty in the definition of "scheme of reconstruction", many companies and practitioners have had to write in to the Stamp Duty Office to seek confirmation as to whether a particular restructuring exercise falls within the exemption afforded by section 15. Unfortunately, the criteria adopted by the Stamp Duty Office appear to have shifted internally over time and now include a condition that the restructured group should not be publicly listed within two years after completion of the restructuring. This is surely an area in which our existing legislation is due for clarification. In this regard, we might look to the Hong Kong example, where under their Stamp Duties Ordinance, there is much clearer and more certain "90% shareholding" rule.

Commercial transactions are of course extremely varied. I understand it is not possible for the Minister to clarify each and every transaction in this House. The Commissioner of Stamp Duties should therefore issue clear guidelines from time to time on the provisions of the Act. These measures are crucial in ensuring that our tax laws are transparent and could be interpreted with a sufficient degree of certainty by foreigners and locals alike. I believe a predictable and stable tax environment is fundamental to the continued development of the financial and other business sectors in Singapore.

Sir, I support the Bill.

Assoc. Prof. Toh See Kiat: Mr Speaker, Sir, I am not a tax expert like the hon. Member Mr Ong Kian Min. So I will not touch on the taxing aspects of this Bill.

I see this Bill however as an opportunity to reform and streamline our laws for the world of Internet trading and to prepare our country and our business and public sectors for electronic document and information management systems. So even though this Bill, as it stands before the House, is primarily one to deal with the physical attachment of E-stamps to physical documents through electronic processes, I would like to urge the Minister to perhaps look wider and further especially in future exercises to amend the Stamp Duties Act and the different Acts dealing with taxes, duties and Government charges.

Clause 4, for example, deals with the stamping of documents. And in the First Schedule of the main Act, there is mention of the stamping of contract notes. I would just like to ask the Minister if he would clarify if these contract notes were to be electronic, whether these would also need to be stamped, or whether the duty would be waived.

There is a new section 6B proposed in clause 5 of the Bill, and this also deals primarily with the electronic procedures for the E-stamp certificates where the electronic stamping of documents will one day be possible for documents that are created online. So if future developments lead that way, as they would especially when we have Internet stock trading and so on, then there would be a need to perhaps clarify the terminology of this provision when it deals with the word "certificate", for example, whether such certificates could be extended to electronic equivalents.

Currently our Electronic Transactions Act does not permit most of the documents in the First Schedule of the Stamp Duties Act to be electronic. But there could come a day when perhaps even the Ministry of Finance finds it comfortable to do something like this in a paperless fashion. Perhaps even there might come a day when the Government needs to include new instruments to be stamped, so I think there is a need to clarify if these certificates would one day be completely electronic and online.

Clause 30 of the Bill deals with certain powers for the Commissioner to exercise. As the Minister has said, it is based on the Income Tax Act and the powers of the Comptroller of Income Tax. I think section 70C that is proposed, especially subsection (2), is a good provision to have in this Bill and in the Income Tax Act and in any of the other tax Acts that we have, in addition to any other Acts that deal with customs duties, excises, Government charges and fees, and so on. The reason I say this is that it makes it very clear that the Comptroller or the Commissioner of each of these respective Acts has got the power to look at computer records. By implication, therefore, computer records for tax purposes or tax documents are permitted and legal in the law. And I have to say this in this House because there is a very strong misapprehension amongst many lawyers, auditors and businessmen that it is fine to have an information technology-based information system or document management system, but these systems are good only for in-house records. But the moment you need to deal with the Inland Revenue Authority of Singapore and the Customs Department, you must produce paper.

So, despite the provisions that we already have introduced in the Electronic Transactions Act and Companies Act permitting electronic record keeping, such people still have the misapprehension that they cannot do so and therefore it would be good if the Minister could clarify at this opportunity presented before the House to clarify these points.

With that, Sir, I support the Bill.

Dr Richard Hu Tsu Tau: Mr Speaker, Sir, I agree with the Member for Pasir Ris GRC that the public should only pay taxes in accordance with what the law requires, and no more. However, I would point out that stamp duty is an important source of Government revenue. In fiscal year 1998, stamp duties worth $950 million were collected. And in fiscal year 1997, it amounted to $1.7 billion. The general anti-avoidance provision, which is similar to that of the Income Tax Act, is introduced to ensure that there are sufficient measures to safeguard revenue and to deter parties from scheming to reduce or systematically avoid payment of stamp duty on dutiable instruments. The introduction of new section 33A is neither to stifle bona fide commercial transactions nor to hamper corporate restructuring. It simply empowers the Commissioner to disregard and make adjustments to certain arrangements which are clearly carried out solely or principally to evade tax.

Tax avoidance schemes are purely tax-driven with little or no commercial value or rationale. This is unlike tax planning where the transactions or schemes have some commercial basis, and where the issue is structuring the most tax-efficient arrangement in accordance with the relevant tax laws. Generally, tax planning, if carried out within the confines of existing laws, would not be caught under section 33A. In assessing whether a particular scheme or arrangement would fall under the ambit of section 33A of the Act, the Inland Revenue Authority would amongst other things look at the presence of artificiality or contrived transactions to reduce or avoid tax liabilities but which have little or no commercial basis.

I would like to stress that the aim of the new section is to reduce blatant or contrived tax avoidance arrangements which can lead to systematic or significant revenue losses to the Government. It is not intended to affect genuine and normal commercial transactions, but because anti-tax avoidance transactions are getting more complex that the Commissioner needs a general anti-avoidance provision to enable him to effectively counter tax avoidance, and also to serve as a deterrent in order to safeguard revenue. Members may recall that this same issue was debated in the House in 1988 when the current anti-avoidance provision was put in place in the Income Tax Act. The concerns then were that this would be a major impediment to the development of our commercial enterprises. But the concerns have proved unfounded. Since 1988, IRAS has not seen the need to invoke the general anti-avoidance provision. Thus, it has been very effective simply as a deterrent. Likewise, section 33A in the Stamp Duties Act will not be invoked unless it is absolutely necessary. To reduce any uncertainty, IRAS would also be prepared to assist any individual or company wishing to consult them on specific transactions as to whether their transactions would fall under the ambit of the new section 33A, provided details of the transactions are clearly presented to them.

The Member has given two scenarios to illustrate his points. In a property sale example, the purchaser may choose to acquire all shares of the company owning the property and pay the lower stamp duty of 0.2%. However, if it is subsequently proven that the purchaser has schemed with the seller to pay stamp duties at a lower rate, such a scheme would fall within section 33A. This could arise, for instance, when many such special purpose property holding companies are set up and frequently traded, amongst other factors.

With regard to the Member's other example on the financing scheme for project development, the borrower is assigning certain assets to the bank as a security. If the assets are reconveyed back to the borrower upon full settlement of the loan, such an assignment by way of security is stamped with the mortgage duty and capped at $500, and not the 3% ad valorem stamp duty. The 3% conveyance duty is applied only when the assignment is effectively a sale.

Section 15 of the Stamp Duties Act provides relief from payment of ad valorem duty on transfers made pursuant to a scheme of reconstruction or amalgamation. The concession is granted on the principle that there is no substantial change in ownership after the reconstruction. Hence a key criterion for remission is that at least 90% of a company must be involved in one single reorganisation exercise. To prevent abuse of the stamp duty remission, a two-year freeze on the ownership is also imposed on the restructured companies and to ensure that the beneficial interest in the shares or undertaking acquired remains substantially with the same people. Hence the condition that the restructured group should not be publicly listed within two years.

The criteria in section 15 are constantly reviewed and revised, if necessary, to meet the changing circumstances and needs of the business community. Successful applicants under section 15 only pay a fixed duty of $10 on each transfer. Whereas a transfer of an undertaking consisting of immovable properties and shares will attract stamp duty at 3% and 0.2% respectively on the value of the undertaking sold. This represents substantial savings. In order that the concession is not open to abuse, it is essential that the applicants make a formal application setting out the scheme together with all relevant documents to justify that the restructuring qualifies under the relevant sections. Hence, the need to make a formal application in writing. There have been cases where claims for section 15 were made despite that the conditions spelt out for remission were not met.

In the case of Hong Kong, the relief is confined to conveyance between associated bodies, and does not include amalgamation between unassociated parties. To qualify, one corporate must own at least 90% of the issued capital of the other. To our knowledge, adjudication is also required in the Hong Kong legislation.

Members can be assured that IRAS will assist and advise companies seeking their assistance on specific transactions. In fact, IRAS regularly liaises with lawyers and tax agents of companies on matters relating to corporate restructuring. Many of them are well aware of the conditions governing exemptions or remissions of stamp duties. They are made transparent to all applicants.

I will now refer to the questions raised by the Member for Aljunied GRC. Presently, stamp duty is payable only on instruments effecting transfers, sales, leases, mortgages of immovable properties as well as stocks and shares. I assume the hon. Member is therefore making reference to contract notes on stocks and shares. If an electronic contract note or any other electronic instrument is an instrument for stamp duty purposes, it will accordingly attract duties. However, for the Member's information, stamp duty for contract notes for stocks and shares is currently suspended until 30th June 2000.

With regard to whether the definition of "stamp certificate" is too restrictive, let me briefly explain to Members how the E-Stamping system works. E-Stamping is an integrated electronic system on the Internet. The whole process is performed electronically, starting with the submission of document details, computation of duty and late penalty, followed by electronic payment and ending with the issuing of the stamp certificate electronically. The stamp certificate is issued on-line and users can choose to store the records electronically or in printed format at their premises. Thus the E-Stamping system can be easily extended to all on-line instruments.

I would also like to thank the Member for his suggestion to include a provision similar to section 70C(2) in the other Acts, such as the Income Tax Act, the GST Act and the Customs Act.

I am pleased to inform Members that there are currently provisions under the Income Tax Act and the GST Act to allow taxpayers to keep their records electronically. IRAS has, in fact, in consultation with the Institute of Certified Public Accountants in Singapore, issued two sets of guidelines in July 1999. As long as these criteria are met, taxpayers can apply to the Income Tax authority to keep their records electronically.

Similarly, the Customs Act provides for the Director-General of Customs to permit records to be kept electronically.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Richard Hu Tsu Tau].

Bill considered in Committee; reported without amendment; read a Third time and passed.