The topics of tax planning, tax avoidance and tax evasion have long been a regulatory focus across worldwide jurisdictions. As tax systems around the world continue to evolve and various authorities intensify their efforts to close loopholes and improve law enforcement, the need to clearly distinguish among these practices has become increasingly critical.

 

Tax Planning 

Tax planning is a legal strategy that leverages statutory provisions to legitimately reduce one’s tax burden within the intent of the law. It is a genuine strategy that permits a taxpayer to take advantage of tax deductions, allowances, credits and exemptions provided for under tax legislation.

Effective tax planning must always be driven by bona fide commercial reasons. Engagement in aggressive tax schemes or artificial arrangements lacking economic substance and solely aimed at deriving tax benefits must be avoided.  For example, the practice of “treaty shopping” where the predominant aim is to take advantage of favourable tax treaty benefits in a particular jurisdiction should be discouraged.

 

Tax Avoidance

Tax avoidance, though technically legal, involves the deployment of strategies or planning through complex arrangements to take advantage of loopholes in tax laws to lower one’s tax liability. Such activity though carried out within the boundaries of law, contravenes the spirit of the law.

There are general anti-avoidance provisions in the Singapore Income Tax Act to deter aggressive tax avoidance arrangements. It is not uncommon for Inland Revenue Authority of Singapore (“IRAS”) to scrutinise taxpayers’ engagement in aggressive tax avoidance strategies with the aim to ensure that the arrangements involved do not fall foul of any tax law provisions. The Comptroller of income Tax is empowered under the legislation to disregard or vary a tax avoidance arrangement and make any adjustments deemed necessary to claw back the rightful tax amounts and impose appropriate penalties.

Businesses are therefore advised to be prudent when structuring their activities. There must always be adequate bona fide commercial reasons behind a business arrangement and any tax benefits derived should only be an incidental outcome and not one of the main purposes of the arrangement. Bona fide commercial reasons in this regard may include ring fencing liability and risk management, ease of securing financing from financial institutions, facilitating business expansion plans, and similar objectives.

Some common examples of tax avoidance arrangements which may attract tax authorities’ scrutiny and attention:

 

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Medical professionals in private practice setting up corporate entities to receive income from their provision of personal skills or services. Such income could have been received directly by individual professionals.

With this structuring, the income derived by the company is taxed at a lower tax rate of 17% (the prevailing corporate tax rate) compared to the highest individual income tax rate of 24% which applies if the individual’s personal taxable income exceeds S$1 million.

Corporatisation by itself is not an act of tax avoidance. What matters most is whether there are genuine commercial reasons for incorporation which requires analysis of the economic realities of the business arrangement.

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The artificial splitting of income through incorporation of multiple companies with no commercial justification but to solely take advantage of the partial tax exemption for the first S$200,000 of chargeable income for each of the companies concerned. In such cases, the multiple companies may perform the same or similar functions, share the same pool of assets and manpower and conduct businesses out of the same business premises.

 

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Failure to account fully for income earned by individuals, disguised as something other than income. For example, the use of a “Loan Scheme” where a company director receives income as a director’s loan, which is not required to be repaid, and the company subsequently writes off the outstanding loan balance.  

 

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Large multinational corporations may engage in base erosion and profit shifting activities to move profitable business segments to low-tax jurisdictions. That said, if such planning is carried out with legitimate commercial objective and justification such as to minimise operating costs and maximise profits for the corporate group as a whole, and is not a deliberate attempt to avoid tax, such arrangements may still be accepted. 

The focus is to ensure that profits are taxed where the economic activities generating the profits take place and where the value is created.

 

Tax Evasion

Tax evasion, on the other hand, is illegal and involves deliberate and fraudulent practices with the aim to avoid or under-pay taxes. It is a serious criminal act which can lead to harsh punishments if investigated by IRAS, including hefty financial penalties and possible prosecution and imprisonment.


Over the last few years, IRAS has pursued the following cases:

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Omission of income

The offence can be omitted cash sales, sub-contractor fees, rental income (Pilot jailed for 6 months for evading income tax by failing to declare rental income) or commission income (Insurance introducer convicted of giving incorrect expenses claims). 

It is not uncommon that businesses sometimes collect cash sale proceeds without charging GST and fail to report such cash sales transactions with the intent to evade both income tax and GST payments to IRAS (Hiding cash sales to evade income tax and GST and Night club operator on GST evasion and money laundering). 

It is also common that a proportion of commission income and/or sub-contractors’ fees to be intentionally omitted from the company’s reported annual revenue so as to keep its yearly revenue below the $1 million GST registration threshold, resulting in the evasion of income tax attributable to the portion of the unreported revenue.

 

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Wrongful claim of expenses

A deliberate attempt in creating bogus documentary records to support payments of non-existent “introducer fees” in order to reduce tax payments (Six insurance agents convicted of falsifying expenses claims in their income tax returns). 

There were also instances of creating fictitious invoices to inflate expense deductions (Director and  her trading company convicted of tax evasion) and other cases involving the disguise of non-allowable expenses (private car petrol costs and personal holiday expenses) as deductible staff costs and business travelling expenses.

 

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Tax evasion schemes

IRAS has uncovered specific tax schemes which were structured with the deliberate intent to cheat the Government and pay less tax. In the case of GST Missing Trader Fraud (Accused person in S$55 million GST Missing Trader Fraud convicted), it involved approximately S$55 million in fictitious sales. These false transactions ultimately formed the basis of fraudulent GST refund claims made to IRAS.  
 

In another case which involved a woman setting up multiple companies and filing fraudulent tax claims over $1.4 million despite her companies engaging in no substantial business activities (Woman who allegedly filed fraudulent tax claims). Investigations revealed that the GST registered entities had no substantial business activities and could not support their input tax claims. 

In yet another case, it involved an Executive Director who was convicted and jailed for the unauthorised collection of GST (Former Group Executive Director first to be jailed for unauthorised collection of GST).
 

Taxpayers found guilty of serious fraudulent income tax evasion may face penalties of up to four times the amount of tax undercharged, a fine not exceeding S$50,000 and/or imprisonment for a term not exceeding five years. For serious GST fraudulent offences committed, such as participating in a specified arrangement for a fraudulent purpose, the offender will be fined up to S$500,000 and/or imprisonment of up to 10 years. 

The severity of the penalties and unexpected legal costs involved can strain the offenders of their financial resources and impact the ability to operate effectively going forward. Moreover, the reputational damage from being caught evading taxes can be irreparable, affecting business relationships and trust with customers.    

    

Tax offences recorded in Criminal Records

Tax offences are serious crimes. Anyone who has evaded tax is akin to have defrauded the State of revenue that is meant to fund public services for the society at large. Under the Registration of Criminals Act, persons convicted of serious registrable crimes listed below will have their particulars recorded in their criminal records.  Also, for those who are convicted and imprisoned for three months or more would be disqualified from serving as director of any company under Section 154 of the Singapore Companies Act.

The following tax offences have been listed as registrable crimes under the Registration of Criminals Act:

  • Evading income tax, GST and stamp duty.
  • Promoting abusive Productivity and Innovation Credit (“PIC”) arrangements.
  • Improperly obtaining GST refunds from the Comptroller of GST.
  • Not complying with notices to provide information to the Comptroller of Income Tax/GST.
  • Providing false or misleading information to the Comptroller of Income Tax/GST.
  • Obstructing IRAS officers from carrying out their duties.

For serious tax offences, IRAS may also work closely with the Commercial Affairs Department to determine if money laundering offences had also been committed under the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (“CDSA”) if the offender conceals, disguises, transfers, converts, removes from jurisdiction, acquires, possesses or uses benefits derived from his criminal conduct or activity.   

 

Importance of Seeking Professional Advice 

Most businesses require tax planning advice at some stage as their operations grow and expand. It will come a time when they will be looking to explore legal ways to reduce their taxes. A suitably structured planning can be a complex exercise. The distinction between tax planning, tax avoidance and tax evasion is often a fine line. Crossing such a fine distinction may lead to serious consequences. Seeking professional advice is therefore essential to avoid unnecessary stress, costly mistake and potential legal issues. 

As experienced tax professionals in this field, we assist Individuals and businesses in navigating the complexities of tax laws and regulations, ensure compliance and minimise tax liabilities. We offer bespoke advice and solutions which take into consideration your circumstances, the commercial factors involved and align them with your long-term business goals. 

Unsure of any aspect of your tax reduction approaches, have concerns if a particular action on your part is considered tax evasion or currently already in correspondence with IRAS on your tax avoidance strategies or under investigation? Come talk to us. Our experts are experienced in negotiating and achieving a favourable outcome for case settlement, reduction of penalties and resolving the matters expeditiously. 

Talk to our specialists

Koh Puay Hoon
Partner & Head of Tax

+65 6594 7820
[email protected] 
Andrew Tan
Senior Director, Dispute Resolution
+65 6594 7859
[email protected] 
Jamie Chuah
Senior Manager, Dispute Resolution
+65 6594 7318
[email protected]