The Income Tax Board of Review concluded that fees paid by the taxpayer, to provide access to a pool of funds for purposes of financing working capital requirements, were not deductible expenses, but represented amounts incurred to protect the taxpayer’s business and its assets and thus were capital in nature.
The case is: GBG v. Comptroller of Income Tax,  SGITBR 2
The taxpayer—a Singapore company involved in ship and rig repair, building, and conversion—entered into three “facilities agreements.” One of the agreements concerned funding for capital expenditures and a general working capital requirement. The second agreement was for general corporate funding. The third was to serve as “standby funds” to finance any funding shortfall for the taxpayer’s expansion project.
The taxpayer paid front-end fees and facilities fees in order to commit the funding from the lender banks. In return, the banks agreed to make the funding available, for a period of time ranging from one to three years. The taxpayer, however, did not draw down on the facility agreements and did not borrow any funds during these periods of availability.
The taxpayer claimed tax deductions for the fees, asserting that the purpose of the fees was to secure the benefit of access to bank loans ranging from one to three years. The tax authority, however, disallowed the claim for deduction finding that the fees did not satisfy the requirements of section 14(1) because they provided “an enduring benefit” for the taxpayer and had no nexus to the taxpayer’s income. Alternatively, it was asserted that the fees were borrowing costs associated with amounts that would fund capital purposes—that is, a capital expenditure—and thus were disallowable under section 15(1)(c).
The Board agreed that the claim for tax deduction of the fees must be disallowed because the amounts represented a capital expenditure. As noted, the fees provided access to a pool of funds, allowing the taxpayer to tap the funds for purposes of financing working capital requirements and general corporate funding—clearly, as the Board found, an enhancement of the taxpayer’s general capital funding. As such, the fees could be said to be expenses incurred to protect the taxpayer’s business and its assets, and as such, the expense was capital in nature.
Tax professionals have noted that from a practical and business point of view, the fees could be seen as a premium payment for a short-term assurance (ranging from one to three years) that funding would be made available when required, and thus may be deductible.
Read a February 2017 report [PDF 387 KB] prepared by the KPMG member firm in Singapore
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.